To paraphrase: Money, money, everywhere, nor any cent to spend. With my sincere apologies to Samuel Taylor Coleridge. While a bit trite, it is true that no matter how much money you make it seems to have been spent long before payday.
The Dreaded Word: Budget
I think it’s fairly safe to say that most people would love to be in a position where money was of no concern. Houses, cars, charities or whatever one could ever want or want to do, done with the stroke of a pen. However, back here in the real world, that is for only the rarified few. All the rest of us should be budgeting.
In the real estate business, lenders take a hard look at your debt to income ratio. There are two parts to this equation. The first is simply the house payment divided by the borrowers’ gross monthly income. The second is the house payment plus any monthly recurring debt, divided by the gross monthly income. If one is considering FHA financing the first ratio allows the house payment to be 31% of monthly income and the second, which adds in recurring debt, may be as high as 43%.
Traditional mortgage (not backed by the government) lenders are free to set their own limits which could factor in job stability, credit scores and other issues. But 31%/43% is a good rule of thumb as a starting point.
What Comes After the Starting Point?
Once you decide you can afford to buy a house, the process gets trickier. What looks like a short distance on a map (a few blocks within a city or a few miles between suburbs) can make a vast difference in how much house you can get for your dollar.
The old maxim “location, location, location” is an old maxim because it happens to be true. Wherever you may be hunting houses, it is a wise idea to enlist the services of a licensed professional. There will be fewer headaches and much less stress if you do. Whichever part of the country you live in you’ll need a real ace in Las Vegas, NV; someone out of this world in Houston, TX; or a real estate agent Chapel Hill residents recommend. More succinctly, a knowledgeable ally to help you navigate the home mortgage world.
The Mortgage World Twilight Zone
In the home buying process, there is a lag time between the final acceptance of a contract and the actual change of title to the property. Even if the buyer is “pre-qualified,” or even “pre-approved,” there are behind the scenes activities going on, which may include:
- The appraisal, to make sure the contract price is reasonable for the market
- The title work, to make sure there is no “cloud on the title”
- Preparation of the mountain of paperwork
- The final credit check
Wait! The final what? When dealing with anything associated with American jurisprudence, such as contract law, there is one extremely important thing to remember, read the fine print. There will be another credit check.
The Credit Card Conundrum
Many home buyers have learned, much to their chagrin, that the pre-qualification or -approval letter they have comes with an important caveat. While it is important to keep track of your credit card debt and credit score at all times, it can be especially crucial when trying to secure a mortgage.
Not a few buyers, in particular, first-time buyers but certainly not exclusively, fall victim to what I call “buyers euphoria syndrome.” The seller just accepted the offer, so naturally you’re excited and your friends and families are excited (maybe even your dog’s excited…or maybe he just wants to go out, but I digress) and everybody has dreams and ideas on how to make the new place “perfect.” Even if it’s just the perfect fire hydrant.
So, let’s all run out to the local big-box retailer and buy paint and wallpaper and curtains, etc., then pop over to the local floor covering store for tile to spruce up the kitchen floor and then, hey! Isn’t that a furniture store across the street? Right there, next to the pet store that sells fake hydrants.
Well, you get the idea. Suddenly your underwriter sees a whole slew of new debt and re-crunches the numbers. Now, the debt ratio is a bit higher or the credit score is a bit lower and the underwriter hits the brakes at the last minute. This is one sure-fire way to kill a real estate deal.
What to Do
Getting pre-approved and making a budget are a great place to start when considering a home purchase. Using a real estate professional is advised, especially for first-time buyers. Keeping an eye on your credit and expenditures before the sale is final and the property is transferred is critical. If you take these steps, the road to home ownership should be smooth sailing!