Buying a home is a big milestone! Proudly hailed as the American Dream by many, homeownership is an opportunity to build wealth, become part of a community, and even gain some valuable tax benefits.
Are you thinking about buying a home this year?
If so, you probably have a lot of questions surrounding the endeavor, and Chambers Bank wants to help make sure you’re prepared for those next steps!
To begin, please read through the following five questions about your financial status and your lifestyle. If you can answer “yes” to all five questions, then you’re probably ready to start looking and reaching out to Chambers Bank for a mortgage loan.
Are You Able to Manage Your Debt?
When a lender decides whether you can qualify for a mortgage, a big component of that decision involves your debt-to-income (DTI) ratio. What this does is compare your total monthly debts to your gross monthly income to see if you have enough cash available for a mortgage payment.
While some lenders will allow borrowers to have a DTI of 43% or slightly more—which is the Federal Housing Authority (FHA) maximum for a conventional loan—many lenders like to utilize the 28/36 rule, and here’s what that means:
No more than 28% of your debt should come from housing costs.
This 28% includes your mortgage, taxes, homeowner’s insurance, and PMI (if required). Therefore, if you make $5,000 gross in earnings per month, your total housing costs should not exceed $1,400 per month.
$5,000 x 0.28 = $1,400
And …
Your total debt should not exceed 36% of your income.
This 36% includes total housing costs for your new home plus all secured and unsecured debts such as car loans, student loans, and credit card payments. So, if you make $5,000 gross per month, your total debt should not exceed $1,800 per month.
$5,000 x 0.28 = $1,800
Do You Have a Good Credit Score?
A good credit score makes your mortgage more affordable and helps you qualify for a lower mortgage interest rate. For most conventional loans, you must have a minimum score of 620 in order to get your loan approved—although this score won’t get you the best interest rate. Aiming for 720 or higher is a great goal!
If your score isn’t where you want it to be, start improving it before you apply for a mortgage loan. Here are a number of things you can do to boost it:
- Pay your bills on time. Set them up on autopay directly or utilize Chamber Bank’s BillPay service through Chambers Online Banking.
- Check your credit report for errors. You can get a free credit report once per year at www.freecreditreport.com. If you find any error, contact the reporting bureau and dispute the errors.
- Ask for higher credit limits. If you can get the credit limits raised on your credit cards while lowering or eliminating balances, your overall credit utilization ratio will be lower, which will help boost your credit score.
- Become an authorized card user. Ask someone you’re close with (who has great credit) to add you as an authorized user on their credit card. It’s easy to do and there’s usually no credit check. In turn, their good credit standing will help boost yours.
Can You Afford the Down Payment and Home Buying Costs?
For conventional mortgage loans, you will need a downpayment of 20% in order to avoid paying Private Mortgage Insurance (PMI) each month—an insurance that protects the lender in the event you default on your loan.
While having 20% down isn’t required to buy a home, you’ll save more money in the long run if you’re able to do so since PMI can cost from 0.2%-2.0% of your loan amount.
Besides having a downpayment ready, you also should have enough money saved for closing costs, which are typically 2-5% of your home’s total price. Additionally, here are some of the following home-buying expenses you can expect unless negotiated otherwise:
- Home inspection
- Appraisal
- Origination fees
- Property taxes
- Title Search
- Homeowner’s Insurance
If you don’t have savings up front for a conventional loan, there are loans available requiring little to no down payment from agencies such as the Federal Housing Administration (FHA), USDA Rural Housing, and the Department of Veterans Affairs (VA), depending on your qualifications.
Do You Have a Reliable Income?
Before you commit to the home-buying process, it’s important that you feel secure in your current employment and that you’re able to show a history of stable past employment.
Lenders will typically ask you for at least two years of tax returns or pay statements as proof of income. If you’re self-employed, you will need to show similar documentation and possibly other income verification such as profit and loss statements, business licenses, and client agreements.
Are You Planning to Stay In Your New Home for a While?
Buying a home is a big commitment, and the upfront costs involved can take a few years to recoup. While you certainly don’t need to stay in your next home for a long time, selling in under five years may result in you not recovering the dollars you put in—especially with closing costs running 2-5% of the purchase value.
Another thing to consider is that if you sell your primary home in under two years and you make a profit, you will have to pay capital gains tax on that profit. The amount earned will be taxed at your ordinary income tax rate if you held the property under a year or up to 20% if you held the property between one and two years.
Your Next Move
If you answered “yes” to all of the questions above, it’s probably time you visit our Mortgage Solutions webpage. Here, you’ll find a mortgage loan application link, contact information for our mortgage team, and a variety of calculators to help you across your home buying and home ownership experience.
Need a pre-approval?
You don’t have to have one just to look for homes, but if you plan to make an offer, having one in hand will help you negotiate better and look like a stronger buyer compared to those without pre-approvals. Interested? Reach out to one of our mortgage team members to get yours started.
