Buy Your First Home

Consider your budget
Think about the maximum monthly housing payment that you can comfortably afford. Take an earnest look at your future; your career, your family, your wants and needs and decide on a housing payment that is reasonable so that you can have it all. Although there’s been a lot written about how hard it is to get a home loan, the reality is that you can easily be approved for a loan where the payment is high enough to reduce your “dream” home into nothing more than a “nightmare” payment. Be sure to consider the big picture.

Learn the Words
Visit the links above to get familiar with real estate and mortgage vocabulary. You will have a lot less anxiety about the process if you understand the correct definitions of the words.

Gather Materials
Make sure that you are ready for the next step, organize all of the relevant information.

• Income documents – paystubs, W2’s, Federal Tax Return
• Asset documents – bank statements, 401K, IRA, etc.
• Credit – Know your total monthly CREDIT obligations
  • Get a FREE copy of your credit report here

• Income
  • You will need to have a job or a regular (verifiable) source of income and proof that you have been employed for at least 2 years – college coursework that lead to a credential can be used to satisfy this requirement.
  • For self-employed borrowers, income is calculated by taking an average of net profit on your tax returns over the last 2 years.

• Assets
  • Downpayment
    • In most cases you will need a downpayment – can be as little as 1% if you qualify for Down Payment Assistance
    • Veterans with a valid military discharge (DD214) can buy with ZERO down payment
    • Special programs for rural areas also allow ZERO down payment

• Credit History
  • You will need to have documented credit history
    • The standard requirement is 3 lines of credit for a minimum of 2 years (exceptions may be allowed) and …
  • A history of paying your bills on time (640 min. credit score)

Income must be documentable.  Income from regular hourly or salaried full-time employment is the simplest to evaluate.  However, self-employed income and inconsistent income can also be used.

The standard minimum (middle) credit score requirement is 640.  However, there are some programs that allow lower credit scores.  Judgments and collections may or may not be an issue depending upon the recency and amount owed.  All incidents of derogatory credit must be explained in writing.  Lenders understand that fiscally responsible people experience periods of financial hardship; they just want to be sure that those times are in the past.

Lenders do calculations to determine your capacity to repay the loan that you are applying for.  The main tools that they use for this evaluation are the front-end and back-end Qualifying Ratios.  They compare your monthly expenses to your gross monthly income.  The front-end (or housing) ratio is calculated by dividing your Total Proposed Housing Payment by your Total Gross Monthly Income.

Example: $1,000 mortgage payment divided by $3,000 mo. gross income = 33% housing ratio

Next, your other monthly CREDIT obligations (car payment, student loans, credit card payments) are added to your proposed Total Housing Payment and a second ratio is computed.  The back-end (or overall) ratio is calculated by dividing your Overall Monthly Payments by your Total Gross Monthly Income.

Example: ($1,000 mortgage payment + $500 other payments = $1,500)  divided by $3,000 mo. gross income = 50% overall ratio

This means that 50% or half of your gross monthly income is allocated to your obligations and there is 50% leftover for discretionary spending.

These days, lenders are very particular about making sure that all the “I’s” are “dotted” and the “T’s” are “crossed” when it comes to compliance with federal laws.  This is such a significant factor today, that a near perfect loan application can be turned down without hesitation if it is out of compliance.  Signatures have to be in all the right places, dates have to be accurate, application procedures must be followed to precise standards.  Your loan file may be perfect in all other categories, but if it is out of compliance with any federal laws, it will not move forward.

The property must meet minimum Condition Requirements for
1) Habitability and 2) Health and Safety

Habitability – As a minimum, the property must have working plumbing, heating and electrical utilities. It is primarily the responsibility of the appraiser to point out any areas that are or seem to be deficient.

Health and Safety – Any property conditions that may compromise the well being of the occupants will need to be addressed and remedied prior to final loan approval.   Examples of such items include, but are not limited to :

• Any kind of leak
• Exposed electrical
• Anything that is not built to minimum code requirements
• Torn carpet
• Improperly installed fixtures (water heater strapping)
• Non-permitted items
• Peeling paint

This is the issue that usually gets the most attention.  Since your mortgage loan uses the property as collateral, the value of the home is a critical component of your loan approval.  If an independent appraiser’s opinion of value falls short of the contract price the loan will not be approved.

If we have a case where the appraisal is higher than our expectation, there is no issue, as it means that the property value is sufficient.  However, in cases where we come up short, all parties, the buyer the seller and their real estate agents, have to renegotiate the terms of the contract so that they can decide to move forward on different terms or simply cancel the contract.

There’s been a lot written about this topic and many advisors give you a quick formula so that you can come up with a figure.  This might allow you to walk away with a “number”, but it wouldn’t really be very helpful.  The flaw with this “number” is that it does not consider who you are.  Since it does not consider your unique wants and needs, it does not serve you.  The best thing to do is to talk to qualified mortgage professional who will take the time to find out who you are and where you want to go – before giving you a number.

Depending on your age, your income, your family size, your lifestyle and retirement goals, etc., the amount of money that you want to allocate towards your housing expense can vary widely.  If you’re a young couple with small kids and higher than average income, you might want to get the biggest and best house because you can afford it.  However, if your savings is low and your goal is to retire “on time”, it might make a lot more sense to buy something where the payment is well below your means.  If you have sizable savings, you can afford to have a large down payment and a get a smaller loan.  However, it might be more beneficial to allow your investments to continue to work for you and take advantage of the larger tax break that a larger loan affords.

The best thing to do is talk to a mortgage professional who will ask the right questions.  Someone who will take the time to find out who you are.

Please complete the short Pre-qualification form on the next tab, then follow the link to schedule your consultation.  We’ll be happy to evaluate your profile and present loan options that will address your (very unique) wants and needs.

After you’ve been pre-qualified and you know your correct price range, you’re ready to go for it.  The next step is really to dive right in.  The homebuying experience is an interative process – you “learn as you go” .  It’s possible, but not likely that you will end up buying what you initially started off searching for.  That’s why it’s important that you take the first step, then the next step.  Until you start looking, the questions that you need to ask yourself to be able to make the right decisions won’t surface for you.   You need to get out there so that you can learn more about your own wants & needs and if you’re buying with someone else; your partners wants & needs too.

After you see a few homes, the world of real estate will slowly start to make more sense to you and you will start to get a better sense of what you can buy in your price range.  You will quickly learn how you can get MORE or LESS for your buck depending on location.  If you’re like most people, you will find that your ideal house is probably at the steeper end of your budget.  This is the time that you will want to have a discussion with your spouse and/or realtor and re-configure your priorities.  Your core priorities will likely remain unchanged, however, most people end up making compromises in areas of lesser importance.

It’s the scariest and most anxious part of the process, but you’ll never be able to buy your house if you only window shop forever.  You have to MAKE OFFERS.  This is very intimidating part of the process because you have to evaluate the risk-reward consequences.  You want to get your offer accepted, but you don’t want to bid too high… and you don’t want to bid too low  and “lose” to another buyer who was willing to offer more either.  You can begin to release some of the anxiety after you have reviewed a sufficient number of homes in the area (comparables or comps).  When you start to get a better idea about the comparable price ranges, you will start to become more comfortable with the process.  Your realtor will be instrumental in guiding you through this stage of the process.   Your very first offer is especially important because you’ll get a lot of education under your belt.  After you go through the process once, every next offer will be less stressful.

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