Archive for June, 2010

The very first thing you need to do is to get pre-qualified by a mortgage professional.  In order to do that you will need to provide them with your personal information such as full name, social security number, date of birth, residences for the past 2 years, employment for the past 2 years, assets, 2 years of tax returns, 2 years of W-2s, and 2 months worth of bank statements. 

You need to understand that being pre-qualified for a certain amount doesn’t mean you can afford to spend that much or that you are comfortable spending that much.  It is best to keep you housing ratio at 31% or less.  In order to figure out what that number is you need to take your gross monthly income and multiple it by .31.  So for example if you make $60,000 per year before taxes you will divide that number by 12 making your income $5,000 per month and multiply $5,000 by .31 leaving you with not spending more than $1,550 per month on your mortgage. 

Keep in mind that everyone’s circumstances are different when it comes to how much you should spend per month on a mortgage payment.  If you don’t have any children you might be able to go a little higher than 31%, if you have 2 kids you might want to go below 31%, etc. 

You will also need to take into account what other debts you have too.  The main debts that we take into account are your monthly payments on credit cards, student loans, car payments, other installment debts, child support, etc. most of which are on your credit report.  It is best to keep your debt to income ratio including your mortgage and the debts just described at 40% or less.  That means your mortgage payment plus your debts divided by your gross income should be less than 40%. 

Do not plan your mortgage payment around a possible promotion or making more money.  If you receive variable income (i.e. not paid hourly or salary) I would suggest taking your past 3 years of income and dividing it by 36 months.  You want to be very careful when it comes to variable income.  I know as a commissioned based employee in the mortgage industry I was advised if I make $150,000 in a year to spend like I make $50,000 because the business is cyclical.  We all know that now and many of us, including myself, learned that the hard way.

Many homebuyers underestimate the costs of owning a home and I have written about this in the past but it is so important to understand and continually be reminded of.  Here is an interesting statistic:

The National Association of Home Builders calculated that the typical buyer of a new home spends about $8,640 within the first 12 months for furnishings, appliances, and home repairs and fix-ups, while the typical buyer of a resale home spends $6,540.

I feel the reason this happens is because buyers are doing their research and preparing in advance.  We as professionals in the real estate field need to make sure we do a better job of this too.  I know on the mortgage end the buyer needs to be informed about how taxes and insurance can go up especially here in South Florida where we are already seeing homeowner’s insurance premiums increasing. 

Another article from The Wall Street Journal not to long ago talked about how “Homeowners should have 1% of the purchase price of their home in savings for improvements and surprise expenses, he says, “That is the absolute minimum. It’s better to have 2% to 3% socked away somewhere.”

If you are buying a home you also need to keep in mind that just because you are pre-qualified for a certain amount doesn’t necessarily mean you can afford it or you are comfortable with your payment.  You should keep your total debt to income ratio at 41% or below preferably 36%. 

You should also consider how much money to put down.  Just because you have 20% doesn’t mean that is your best option.  You want to make sure to have at least 12 months of mortgage payments or more in reserves.  You don’t want to be house rich or cash poor. 

I have a lot of people ask me about bi-weekly payments which results in 13 mortgage payments per year instead of 12 and dramatically reducing the time it take to pay off your mortgage.  My advice on this is to not have it set up with your lender so that you aren’t locked into having to make 13 payments in case an unexpected expense comes up.  I do understand some do not have the discipline to do this so I guess you could just set up making an extra principle payment as an automatic debit. 

These are just some of the items to consider and there are certainly much, much more.