The new year ushers in new hopes and new goals that could include buying a home. It’s a dream worth pursuing amid rising homeowners’ wealth.
A quick search on Google yields answers to your questions about buying a home. Your friends or family members likely have their own stories to tell. All this information can be helpful but sometimes confusing if you are new to the homebuying scene.
For your convenience, we rounded up three things that we think you should know when getting a mortgage for your home.
Three Important Things to Consider When Buying a Home
When buying a home or specifically borrowing money for it, these things should be on your high-priority list.
- Down payment
Buying a home is largely a financial decision and as The Hill pointed out, the government’s guarantee or backing on residential mortgages helps low-income Americans buy a home.
According to the U.S. Census Bureau, the median household income is $55,322 (using five-year estimates for the period 2012-2016). Compare this with the median housing value of $184,700 also based on the same five-year estimates.
This leads us to an important question for homebuyers: Can you afford a mortgage on a home?
There’s an easy albeit simplified way to measure this “degree of affordability”. It’s called debt-to-income ratio.
DTI shows whether your current income will be able to support your new mortgage debt on top of your existing debt obligations (although not all expenses are included in the DTI calculation).
Loan programs and lenders have varied qualifying DTI ratios. It can be 41% or up to 50% for Fannie Mae and Freddie Mac standards. DTI ratios higher than 50% may be accepted but these are usually backed by strong compensating factors like high credit score or large down payment.
Lenders also have their own calculations to arrive at DTIs. And the methodology is different for salaried workers (W-2 employees), self-employed, or business owners.
Calculating DTI Ratios
From your end, you can compute your own ratios:
- Front-end ratio consists of your housing expense, e.g. rent or mortgage payment on your primary residence (PITIA). Divide this by your gross monthly income and you’ll get the housing expense ratio. The standard allowable ratio is 28% although some lenders can accept higher than that depending on the borrower’s circumstances.
- Back-end ratio: add your PITIA on second homes or investment properties; payments on certain installment loans like car loans, personal loans and student loans; child support; alimony; and credit card payments, and divide them by your gross monthly income. Back-end ratios can reach 50% or higher with compensating factors.
It’s one of the expected and expensive costs incurred in buying a home.
This upfront cost runs in thousands and understandably, remains a hurdle for the ages. But, there are ways to climb over this wall.
For one, there are low-down-payment loans. FHA loans have down payments as low as 3.5%. Fannie Mae’s HomeReady™ has a minimum required down payment of 3%. And VA loans are all for 0% down payments.
These low-down-payment loans can be combined with down payment assistance programs operating on the local and/or state level.
Down payment assistance is in the form of grants and second mortgages with zero interest and/or deferred payments. Some mortgage lenders have their own down payment assistance. It’s also common for state/local DPA programs to include closing cost assistance.
Government and GSE loans also allow gift funding where an eligible family member, employer or a charitable institution contributes a portion of the down payment.
While you still need to save money as your contribution to the down payment per specific loan programs, what’s noteworthy is that you don’t have to wait for long to save as much because you may be eligible for assistance
The process of “buying a home” does not end at closing.
Once you’re handed the keys to your new home, it’s a start of a new chapter called homeownership.
At this stage, you become responsible for the home’s monthly mortgage payments, property taxes, insurance premiums, repairs, and improvements.
You can look into rehabilitation loans such as the 203k loan program for minor and major home repairs.
Keep your mind open to ideas when navigating the path called homebuying and ultimately, homeownership.