Tuesday, June 17, 2014

What You Really Need to Know to Buy a Home

Sometimes, The Captain (that's moi) needs to get off his high horse and get back to basics on what this blog is supposed to be about. A Facebook post from Neighborworks America kind of kicked my figurative butt into doing this post, namely, on what you need to do to buy a home. Fortunately, it was a figurative kick as well.

Anyway, here's where to begin.

1. Decide how big of a loan you can afford. A lender can help you, but here's a quickie DIY way to give you a ballpark idea. Take your monthly gross income and multiply it by 30%. That's an approximation of how much you should spend on housing per month.

Here, things get a little trickier. Included in this figure is not only loan principal and interest, but property taxes and insurance. Depending on the loan and how much the down payment is, you might have to pay mortgage insurance premiums as well.

Here's a word picture, though, to help make some kind of sense of all this stuff. The principal and interest payment on a typical 30-year mortgage of $200,000 at 4.5% interest is $1,013. Add property taxes of $2,500 per year, home insurance of $700 per year, and a mortgage insurance premium of 1%, and the payment pops up to $1,447 per month. Does that help see what's going on?

One more thing. The 30% affordability marker is front end, in that it's where you begin the analysis. At the back end is the debt-to-income ratio (DTI). The DTI is the ratio of all of your monthly debt payments, including the mortgage, to your monthly income. To get a mortgage, you need a DTI of 43% or less.

2. Check out interest rates. Bankrate.com is a good place to start. When it comes time to see a lender, check out at least three and get a Good Faith Estimate from each to learn the true costs of borrowing. Lenders charge an origination fee and points, escrow fees, this fee, that fee, and so on, and they vary by lender and available programs. Not all loans with the same quoted rate are equal.

3. Do you know your credit score? It assesses your risk and isn't based on income. The higher the FICO score, the lower the interest rate you can get. Don't go to any of those website that offer *free* FICO scores or *free* credit reports. Some lenders can help you find out, or you can get a rough estimate from FICO at  whatsmyscore.org.

4. Determine how much you have for the down payment, closing costs (maybe 1%-3% of the loan), and a reserve for surprise repair costs, moving expenses, and any miscellaneous thing that comes up. Whatever you have now for these popup costs won't go away. In fact, there could be more, because landlords fix stuff that owners have to fix themselves.

Finally, if you've got decent credit but are a little short for the down payment, assistance is available. I read somewhere within there last two days (forget where) that nearly all the programs offering assistance are now, for the most part, fully funded. Where to look? Depends on where you live, but once again Bankrate.com has an article on where to look. Just scroll a little more than half way down.

Questions? Don't be afraid to ask. I don't bite and my mom always said I was reasonably nice.

NOTE: Here's a link to a LinkedIn article I wrote on branding for real estate brokers.