With Spring shortly upon us and as the flowers begin to bloom and the trees begin to bud real estate sellers and buyers start venturing out in the market giving birth to the fabled “Spring Market”. As such I often get many questions from home buyers both first timers and seasoned veterans regarding the processes involved in buying a home. I find that many things can be disseminated into 10 steps or less and buying a home is no exception. The next few entries will be dedicated to providing a step by step process on how to move from home dreamer to home owner.
Step 1 : Determine Your Budget.
Determining ones budget requires a little self reflection and honesty. Buyers need to take a long hard look at themselves and their lifestyle and attempt to determine what they can afford to repay while keeping a lifestyle they can be happy with. Buyers need to ask themselves questions, Am I willing to quite smoking to keep more money in my pocket? Am I willing to part with an uneconomical vehicle for perhaps low insurance rates and savings at the pump?
There are many things to consider when contemplating the idea of home ownership. Luckily a Realtor can aid greatly in this process.
The next step in determining one's budget is to analyze one's net worth and find out how much “house” they can afford. This is done by subtracting liabilities from assets the product of which is their equity.
Some examples of assets are:
A Car or other vehicles
Bank accounts (Savings)
Leans or Lines of Credit
Now that all these variables are tallied up, its time to tally total household income. A lender will want to know how much a buyer earns in order to figure out the size of mortgage they qualify for. Lenders will also require documentation for proof of this figure. This can be done with a pay stub or for the self employed an earnings statement from last year's tax year.
There are two simple rules and calculations lenders use to figure out what one can afford. The first affordability rule is insuring that housing costs do not exceed 32% of gross monthly household income. Costs include mortgage principle and interest, taxes, and heating. These costs added up equal one's GDS (Gross Debt Service) ratio.
The next tool used is the TDS (Total Debt Service). This affordability figure ensures that a buyer's total monthly debt load is not more than 40% of their gross monthly income. This includes all debts such as mortgage payments, car payments, and credit card payments. Added all up and subtracted from income produces one's TDS ratio.
Whoa, a lot to take in!? Not to worry, this why professionals are so valuable! Home ownership is not as cut as dry as crunching numbers. There are abstract figures to take into account like career paths, child rearing, and family stewardship (i.e. taking care of your parents). All of which needs to be considered when analyzing affordability.
Now that the affordability picture is a bit more clear a buyer can begin to determine (roughly) how much they can borrow. This amount will vary from lender to lender which highlights the need to SHOP AROUND FOR A MORTGAGE!
Step 2: Where to Buy and For How Much?
Once a budget is in tow, its time to think about what kind of home a buyer would like and in what area. Here it is advantageous to talk to a Realtor and form a “Wish List”. Do you want to live in the 'burbs or is the city more your cup of tea? Do you want a home you can grow into or are you just looking for something for the interim? Once a wish list is complete a Realtor can pin point areas, or properties that may be suited to a buyer and their finances. Remember that the home of one's dreams maybe too pricey in the area that they love. Buyers should analyze their situation and see if lowering expectations for their 1st home is an option. It is important to remain flexible, finding a perfect home the 1st go around is difficult. Sometimes it may be better to settle, pay a home off quickly and upgrade later on in life.
Step 3: Loans are Like People Each One is Different.
Remember getting a mortgage is perhaps the largest amount of money many people will ever borrow in their lifetime. Therefore, it is important to shop around and get the loan that is best suited to a situation. If one would like the security of knowing their monthly payments for years to come then perhaps a long term fixed loan is appropriate? If a buyer wants to make repayments and perhaps want a lower rate then a variable rate mortgage may be the way to go. The best method for a buyer to determine what is right for them is to talk to a mortgage professional who can guide them through the process of home financing and the options associated with it.
Stay tuned for my next post where I will discuss steps 4-6.
Thank you for reading,
“Turning Your Dream's in to an Address”