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  • Writer's pictureElken Miller

Sooner or Later...... Don't Break the Bank

You want to buy your first home. Congratulations! Whether it be a two-story home with a white picket fence in the suburbs, a tiny house in the woods or a high-rise condo in the middle of a metropolitan city, one thing they all have in common is you are going to need money to buy it. Sooner or later, you are going to need to take a long and hard look at your finances and for many, that can be scary. What you DON"T want to do is over extend yourself and purchase a home that is outside your means.

Finding A Trusted Lender: The first thing you want to do is find a trusted lender. Asking your Realtor for recommendations is a great place to start. Local lenders tend to have their finger on the pulse when it comes to current market trends in the area you are looking to buy, but many buyers have success with larger mortgage companies that serve across the country. Finding a perfect lender is important because they provide important information: current mortgage rates, compare different types of loans you can qualify for, conduct a detailed look at your finances to determine debt -to -income ratio and can calculate your monthly payments (which may include property taxes, HOA fees, and home owner's insurance). There's a lot that goes into qualifying to buy a home. Lenders not only need to approve you, they also need to approve the house you are buying.

Debt -to- Income Ratio: or DTI, is the percentage of your monthly gross income that goes toward paying your debts, and it helps lenders decide how much you can borrow. DTI is as important as your credit score and job stability. A high debt-to-income ratio was the most common primary reason for mortgage denials in 2020, according to a NerdWallet analysis of federal mortgage data. Lenders calculate your debt-to-income ratio by dividing your monthly debt obligations by your pretax, or gross, monthly income. DTI generally leaves out monthly expenses such as food, utilities, transportation costs, health insurance and entertainment.

Mortgage Rates Aren't Everything: The kind of loan you decide to apply for will also affect your buying power. There are several different types of loans. The most common ones are conventional, fixed rate, adjustable rate, FHA and VA. Depending on your circumstances, you may qualify for more than one type of loan. Your lender will help guide you. A Conventional Loan just means that the loan is not part of a specific government program. A Fixed Rate Mortgage Loan is a home loan option with a specific interest rate for the entire term of the loan. The most common are 15 and 30 year conventional fixed loans: you take out a mortgage at a fixed rate and pay it off over the course of 15 or 30 years. If your home owner's insurance and property taxes are attached to that monthly payment (which is often the case), your payments may increase or decrease a bit over time based on state and local taxes in your specific neighborhood.

Adjustable-rate Mortgages (ARMs), have an interest rate that changes periodically depending on changes in a corresponding financial index that's associated with the loan. Generally speaking, your monthly payment will increase or decrease if the index rate goes up or down. FHA Loans are government-backed mortgage loans that can allow you to buy a home with a smaller down payment and lower credit score. VA Loans allows active-duty and retired service members, veterans and eligible surviving spouses to finance a home with no down payment, no mortgage insurance and lenient credit requirements.

Locking In And Paying Down: It's important to keep in mind that mortgage rates fluctuate until you lock in a rate which typically happens 30-60 days before closing. Also, most mortgage loans will permit you to pay extra on your payments. Make sure when you do that, you indicate that the extra money is to be used to pay down the principle of the loan. Just paying an additional $100 a month towards the principle can change a 30 year loan into a 24 year loan!

Avoid Becoming House Poor: The bottomline is, you don't want to be house poor. Overall, across the country, a home purchase is the best way to invest your money. Year-over-year, homes increase in value as your debt to the bank goes down. So, even if your first purchase is not your "dream home", it's better to buy a house that you can afford to ensure you’re able to pay your debts and live comfortably at the same time.

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