Wise Financial Planning MUST Come Before Homeownership
August 20, 2014
The first time you consider purchasing a home, you should automatically begin to work on your financial goal and write it down. Because of all of the online resources to browse all of the gorgeous and beautiful homes it can be VERY tempting to start mentally moving yourself in before you know if you can afford it. Even if you think you can afford it, it is not up to you to decide. The bank lending you the money decides if you can afford it or not. The biggest misconception in buying a house is to look for a house first. Actually the first step is getting approved. It is a good idea to casually browse to do your homework to get a feel of what houses cost. That way you know what to look for once you are approved for a loan. It is always good to research the market.
When you are ready to have your lender consultation to see if you can be approved, the lender will base their decision by your credit, debt-to-income ratio, job history, and your assets. Your debt-to-income ratio is based off your monthly payments of credit cards, car payments, student loan, and any personal loans compared to your gross monthly income. In some cases the lender can approve you for more than what you might be able to afford per month. In a case like that, it is good to come up with a monthly mortgage amount you are comfortable with and find a house based off of that amount instead.
You should also base your monthly mortgage amount based off any other financial goals you may have in the future like raising a child, college, vacations, and especially retirement. And I truly believe you should set a little something aside each month for the upkeep of your house and any repairs you may need in the future.
The maximum overall debt-to-income ratio with most lenders is 43%. With some lenders it is 41%. Your portion for your housing payment should be 31%. The housing payment per month consist of PITI....Principle (loan amount), Interest, Taxes, and Insurance. If you make a down payment under 20% of your loan amount you may also have mortgage insurance. Your lender will let you know what you will need to do to make sure your ratio falls in line with the correct percentage to be approved. That is why it is a good idea to talk with a lender as early as possible so you know what you need to do in advance. You would hate to save your money and get ready to move just to find out you have to wait a year or two. #Warning ......DO NOT WAIT UNTIL THE LAST MINUTE TO TALK TO A LENDER!
Strategic Savings Plan
In order to buy a house the money you need to save is for your down payment, inspections and any closing cost. Create a financial plan and STICK TO IT! Brainstorm on what you can cut down on or just cut out all together. STOP EATING OUT EVERYDAY FOR LUNCH. The average American spends around $5 a day on lunch alone. That is $100 a month. Not including dinner, weekends, or Starbucks. On the weekends find something to do that doesn't cost a lot of money. Going out on the weekend could easily have you out of $50-$100 or more. Not to mention the gas you spent to go spend that money. If you eliminate these items alone you could easily put away $200 or more per month. You can also cut down on your cable bill. Get rid of all of the premium channels and use Netflix, Hulu or Redbox. Getting rid of the premium cable channels can add an extra $25-$50 to your savings a month. Open a separate savings account. Have it set up to automatically transfer a portion of your paycheck directly to that savings account. Learn to live on less income. You can also consider tapping into your 401K or IRA. Also, if you get a lump sum of money like a gift or tax return DON'T SPEND IT. Put that extra money towards your down payment. You can even get a part time job and put that money aside. If you sacrifice for a year or two the payoff with be well worth it. You can achieve your dream and officially become a home owner. That means NO MORE RENT!!!