Getting a mortgage to buy a Columbia SC home is about to get a lot harder starting in January. That's when new mortgage rules go into effect that are almost certainly going to make it even tougher on folks getting a mortgage to buy a home or refinance an existing loan.
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Home buyers, whether first time or not, face many challenges before closing on the home of their dreams.
Getting a mortgage can be a challenge in and of itself these days. Then you need to find the right real estate agent to assist you, looking at perhaps dozens and dozens of homes looking for that perfect fit. All this while trying to stay within a budget.
Just because you think you can afford mortgage payments doesn’t necessarily mean you can afford the home. There’s more to it than that.
Homeowner’s insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs first-time homebuyers tend to overlook. Keep in mind, property taxes and insurance have a tendency of going up every year.
Home buying doesn’t begin with home searching. It begins with a mortgage pre-qualification. Get pre-approved, THEN find a home. This way you’ll make a financial decision versus an emotional one.
Spending all or most of your savings on a down payment and closing costs is one of the biggest mistakes first-time homebuyers make. Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are left with no savings at all.
If you have to use every dime you have in savings in order to scrape up enough cash (20%) to avoid paying mortgage insurance, you’d be better off not living on the edge and pay the mortgage insurance premium until you have enough equity in the home to have the insurance dropped.
So you’ve found the perfect property and gotten pre-qualified for the mortgage. The contract is signed, and you close in 30 days. Don’t go out and start buying furniture for the house and run up credit bills in the process. There’s a good chance the Lender will pull your credit report again before closing to make sure your financial situation hasn’t changed since the loan was approved.
Buying a home can be a rewarding time in your life, but it can also be a stressful time, so make sure you take these things into consideration before you even start the process.
How much home can I afford? This is the question every person thinking of buying a home should ask. Or better yet, how much home can I easily pay for?
Before you even start looking at homes on the Internet, or thinking about going to see a real estate agent, you should take a hard look at your finances. If you’re barely able to make your rent payment each month, buying a home may not be your best option.
Yes, sometimes a mortgage can be cheaper than rent, but don’t forget, as a homeowner, you’re also responsible for taxes, homeowners insurance, repairs, and sometimes association fees. So figure out how much you can pay, then how much you can “easily” pay.
Debt To Income Ratios
Lenders use ratios to determine what you can afford to pay for a home. To follow their example, figure out your debt to income ratio yourself. It’s a handy number to have whether you obtain a mortgage or not.
Front End Ratio
This will be shown as a percentage of your gross monthly income. This number reflects what the lender believes you can afford as a loan payment based on your gross monthly income.
Back End Ratio
This number is your new mortgage payment plus all recurring debt. For example, if you pay $300 per month on your car and you pay $150 per month on a credit card, the total of $450 plus your new mortgage payment makes up the back end ratio.
Most lenders want you to keep your debt to income ratio between 34 and 38 percent. Meaning, your total monthly debt should not exceed 34 to 38 percent of your monthly income.
Expect to pay anywhere from 2 to 3 percent of the sales price for closing costs. So for example a $150,000 home will run you closing costs of about $4500 in addition to your down payment.
Loan programs can vary greatly between lenders, so it’s helpful to enlist the aid of a mortgage broker when shopping for a mortgage because they know the requirements and guidelines of many different lenders. They can shorten your shopping time and potentially save you from getting a loan with less than desirable terms.
Different lenders will have different underwriting criteria to determine the risk they are willing to undertake by providing you with a mortgage. Part of that criteria is the down payment. Programs range from no money down, a/k/a “100% financing”, to 20% down or more, and a number of factors will determine which ones (if any) you will qualify for.
Determine Your Price Range
Now that you know how much of a mortgage you can likely be approved for, you can work backwards to determine what sales price range you need to focus your search efforts on.
Experts recommend that once you’ve determined how much you believe you can afford to pay, set aside the difference between what you’re paying now and what you would be paying as a homeowner, factoring in a set amount for any unforseen home repairs. Think of it as a “dry run” to see how well you do.
Interest rates will change how much your mortgage payment will be, and those rates change often – daily, and sometimes even hourly.
If things are too tight, consider eliminating debts and/or opting for a smaller home. Many individuals have started small and worked their way “up the ladder” of home ownership, buying successively larger homes until settling upon the one they want to live out their remaining years in.
Nothing stays the same forever – things happen, jobs are lost, people get sick, houses catch fire, whatever, so it’s a wise home buyer who plans for such contingencies, allowing plenty of breathing space between what they can afford and what they can easily pay for.
If you need help determining what that amount is, feel free to contact us for a no-obligation consultation, or find a reputable mortgage broker to help.
What do mortgage lenders look for when they scrutinize your finances? It all boils down to financial stability and making sure you’re a good credit risk.
On your application, you’ll be asked to disclose personal finance information that will help the lender decide whether your finances are stable or precarious at that moment in time.
Salary/Annual Income: Lenders want to see that you’re gainfully employed. If you’re employed as a full-time employee, receiving a W2, that’s going to be the best indication of financial stability. (Lenders don’t assume you’re going to be losing that job anytime soon.) If you’re a 1099, or contract employee, or if you own your own business, you can still buy a home or refinance, but you’re going to have a tougher time proving that you’re financially stable. Lenders see 1099 contract employees as temporary, even if you’ve been “temporarily” employed for years in this manner. Self-employed individuals (and those who receive 1099s) will have to show stable income for at least two to three years, which is usually done through tax returns.
Tax Returns: Your lender may ask you to provide copies of your tax return (particularly if you own your own business), but you’ll be asked to sign a tax form permitting the lender to pull its own copies of your tax return directly from the IRS. Obviously, with today’s tax software, it’s easy to create a second set of tax returns you didn’t file with the IRS. This way, your lender can see what’s really going on with your finances. Tax returns can be a minefield with today’s lenders.
Bank/Retirement Account Statements: Lenders want to see how much cash you have on hand, and how cash has come into and out of your account over the past year (and sometimes longer, particularly if you’re a small business owner or a 1099 contract employee). Large, unexplained cash withdrawals and deposits are a red flag, as are accounts with extremely low balances. If you’ve overdrawn your account – watch out. Lenders really don’t want to see any sign that you’re not managing your financial accounts with the utmost of ease.
Cash on Hand: How much cash you have on hand is a bigger issue for lenders now than in the past. You’ll need cash to pay closing costs, and to have in reserve. Lenders want to see at least a month’s worth of expenses (mortgage payment, taxes, insurance) to make them feel as though you won’t go delinquent on the loan payment at the first sign of trouble.
Credit History/Score: Since Minneapolis-based Fair Isaacs invented the concept of a credit score, it’s been one of the key factors lenders consider when deciding whether to approve your loan application. That hasn’t changed. In fact, lenders are now looking for higher credit scores than ever before. Managing your credit history is a skill that’s becoming increasingly important, as we move to an electronic society. You need to regularly check your credit history, and if there are errors or your history contains erroneous information, you’ll need to work on correcting those problems. You’ll also need to think about how each credit account you open or close, and how you use the lines of credit that you have, will affect your credit history and ultimately your credit score. Having a higher credit score will save you thousands of dollars over the life of any loan you take out.
You can get a free copy of your credit history and pay for your credit score (around $9) at AnnualCreditReport.com. This is the site maintained by the three credit reporting bureaus: Equifax, TransUnion, and Experian. You can also buy a copy of your credit score from each credit reporting bureau and directly at MyFico.com.