Itâ€™s finally time. Youâ€™re ready to buy your first home. You know you need a mortgage, but where do you start? How much home can you really afford?
When it comes to getting a mortgage, there are several loan programs available, each with its own set of guidelines and rules, says Ken Pederson, branch manager for FAIRWAY Independent Mortgage Corp. in Lancaster.
â€œConventional loans are primarily governed by Fannie Mae and Freddie Mac, FHA loans by HUD, VA loans by the Veterans Administration and USDA/Rural Housing Loans are governed by the United States Department of Agriculture,â€� he says. â€œEach loan program has a different set of guidelines and rules that determine how much a borrower can borrow and qualify for.â€�
But even before a potential homeowner applies for a mortgage, he or she can follow some general guidelines, Pederson says.
Know your numbers
â€œHow much a buyer can afford is dictated by their annual income that a lender can use in qualifying and their monthly obligations such as car loans, credit cards with balances, student loans, etc.,â€� he says. â€œA normal rule of thumb is to take your gross annual income and divide that by 12 to determine your gross monthly income. Then take your gross monthly income and multiply times 30 percent, or .30. That amount equals about what your maximum monthly home payment should be.â€�
That number includes real estate taxes, home insurance, mortgage insurance costs and homeowner association fees, too, he says.
â€œFor a homebuyer, this helps; however, this wonâ€™t equate to a mortgage amount, only a payment,â€� he explains. â€œYou will need a good calculator to translate this into a mortgage amount. This rule of thumb can be impacted by the amount of debt the buyer has. Your new home payment and regular monthly debt payments should be about or less than 40 percent of your gross monthly income.â€�
To quickly find the amount of mortgage you may qualify for, take your gross annual income times three, he says.
â€œIf you earn $50,000 a year, times three equals a $150,000 mortgage,â€� he explains. â€œAnd this is typically conservative. We have clients that borrow four times their earnings and sometimes even more, depending on the loan program, credit and financial picture of the homebuyer.â€�
Know your options
Tom Bayles, broker/owner of Mortgage Craft LLC in Lancaster, says the process of saving money for a down payment can be time consuming and frustrating for first-time homebuyers.
â€œIt will leave many first-time homebuyers on the sidelines waiting to accumulate enough down payment money to afford their first home,â€� he says. â€œWhile they wait, home prices escalate, mortgage rates rise and rent money continues to flow with no future value.â€�
Mortgage options exists that can make it affordable â€” and easy â€” for first-time homebuyers, he says.
â€œA newer first-time homebuyersâ€™ conventional mortgage requiring 3 percent down is now available,â€� he says. â€œIn certain markets, outside of major metropolitan areas, a 0 percent down USDA Rural Housing product could be a viable option. For those with credit blemishes, the FHA 3.5 percent down option is worth a look.â€�
Bayles cautions that qualifying for a mortgage does not offer any real protection against overextending.
â€œLenders do not look at some major expenses that may rank higher than credit payment, like charitable giving, tithing and health insurance cost,â€� he says. â€œEach person must analyze for themselves.â€�
Potential homeowners should also be prepared to pay closing costs, he says, which can range from $5,000 to $20,000.
â€œThis can be reduced by negotiating help from the seller and lender to bring it down, even as low as zero,â€� he says.
Know your limits
Pederson says itâ€™s important for homebuyers to purchase a home they feel is affordable to them.
â€œWhen a lender tells you that you qualify for X, it does not mean you are going to be comfortable with that payment and upkeep of that home,â€� he says. â€œAnd think about tomorrow, too. Are there notable pay increases coming, potential car loans or deferred student loans, family growth? How might these things impact your comfort level tomorrow?â€�
When youâ€™re ready to get a mortgage, there are other things to keep in mind, too, Bayles says.
â€œHave at least $2,500 saved and know what town you might like to live in,â€� he says. â€œLook at a mortgage payment that is not significantly more than your rent cost, to avoid payment shock. Examine your future income. Is it on the rise or do you see reductions coming? What are your family plans? Will you stay three years, 10 years, (is this) your last home?â€�
He also says itâ€™s important to be conscious of what youâ€™re spending â€” to a degree.
â€œBe careful not to be too frugal and end up having to buy another home too soon,â€� he says. â€œThe cost of an expensive home may be less than the cost of replacing the wrong home.â€�
Know where to get help
Both Pederson and Bayles say future homeowners should find an adviser to help in the home-buying process.
â€œThis is often a parent, good Realtor, mortgage broker or even a friend who has traveled down this road,â€� Bayles says. â€œWisdom is found in many counselors. You will know when you find the right person who takes pleasure in educating you as to what to expect. If you have no interest in such things, then make sure you choose a Realtor and lender well. Sometimes they will refer to each other and you will get two great partners in the process, but be discerning. Test them to see if they are really interested in you or just the sale.â€�
Pederson says although potential homeowners can find a wealth of mortgage information online, itâ€™s important to meet with a loan officer to understand all of the nuances and their impact on you.
â€œIf your plans are to buy a home in the next 12 months, schedule a pre-purchase consultation with your lender of choice now,â€� he says. â€œThere is so much information we can provide to a homebuyer today, to help them prepare for when they jump into the market.â€�
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