How Much House Can You Afford?
House hunting begins at home -- with planning. The first step toward buying a house is to Contact Us so that we can determine the strategy that's right for your unique situation. Before you grab the road maps and decide to hit the streets to look at houses, you need to know exactly what you're looking for ... specifically the amount of money you can afford to spend on a home. This is where arranging the financing for your home purchase becomes important. The real estate market is such today that no sellers will accept an offer for their property without the required financing (and sometimes financial) information. If you don't know a loan officer that you want to work with, you can find one in the yellow pages ... or we can recommend a few who routinely finance purchases for our clients. You can find them in our Business Directory.
In addition to the financing, we will need to discuss the Agency Disclosure forms that are discussed in Understanding the Role of Real Estate Agents. These forms must be completed before we can begin a serious search for a property. We will also need to discuss a Buyer Representation Agreement. That document outlines your responsibilities as a buyer and our responsibilities as your Realtor. Without this agreement, our agents cannot discuss certain things about properties, due to the confientiality that is required in real estate transactions. This is because until we have a signed Buyer Representation Agreement, we actually work as a "sub agent" representing the seller of the property!
In today's market, the availability of the Internet and E-Mail have made it possible for us to do quite a bit of work before we ever walk into a house. The other big part of the process at this point is starting to arrange the financing. This is the beginning of the process called the "pre-qualification." You can contact any qualified loan officer that you feel comfortable with and then provide us with a copy of the pre-qualification letter. Under the Ethics Rules outlined by the Maryland Real Estate Commission, any information that you provide to us must be kept confidential (unless you expressly authorize us to release it to a third party ... such as a loan officer).
Knowing your affordable price range will bring your house-hunting into focus. Before you even consider going out to look for a house to buy, you need to know how much house you can afford to buy. There's no sense in you looking at a $300,000 home if you will only be able to pay $200,000. In addition, there's no sense in wasting our time driving around looking at houses if you will not be able to arrange financing due to credit problems, such as late payments, bankruptcies and foreclosures. Just because some of these issues may be there, though, should not discourage you from going ahead with a pre-qualification. There are an incredible number of loan programs available, and one might be just right for you.
Some lenders will, for a small up-front fee, send out all required verification and will pre-approve you for a mortgage. Other lenders, like the ones that we work with, will do this free of charge. This gives you the opportunity to negotiate as a cash buyer. As a buyer, you have the right to choose whichever mortgage lender that you prefer.
The amount of house you can afford to buy depends on two things: how much you can afford for the monthly housing payment (the principle and interest on the mortgage loan, hazard insurance that will protect the home against fire and other hazards, property taxes , and how much you can invest in the down payment. These four costs are often abbreviated "P.I.T.I." For some buyers and lenders, monthly housing costs may also include other items like the homeowners association dues, condominium fees, and mortgage insurance. Here are some things to keep in mind:
In todays market, an affordable home is not so much determined by sales price as it is by the financing which translates that price into a monthly payment. A house hunters first step is to set a housing budget, then go shopping for the house (price) and payments (P.I.T.I.) that fit that budget. Even though there are many ways to qualify to buy a home, make sure the monthly payment makes sense for you. How large a payment you qualify for will depend upon a variety of factors. These factors include your credit history, the size of the down payment you can make on the property, and your length of employment. Everyones circumstances are different.
One of the things that a loan officer will discuss with you is your credit score. The FICO (Fair, Isaac & Company) credit score has become an important part of the pre-qualification process. When you know what your credit score is, you have an opportunity to make changes that will affect your ability to obtain financing when you need it. Even before you speak with a loan officer, you can get a copy of your credit report and FICO score. You can get this information from a variety of sources. The three big credit bureaus will send this information to you for little or no cost. They are: Equifax Information Services, LLC; Experian; and TransUnion LLC Consumer Disclosure Center.
If there are errors on the report, or surprises, you should contact your creditors to make corrections or negotiate settlements. You should also notify the credit bureau of any disputes. Legitimate black marks on a credit report won't disappear quickly. It normally takes seven years (ten years for bankruptcy). It has been our experience that lenders will give recent responsible activity the consideration that it deserves. The farther back in time the black marks on your credit report are, the less likely they are to cause major problems when you try to arrange financing for a new home.
The key items are the size of the down payment, interest rate, any monthly property fees, and the amount of the mortgage loan. The down payment might be zero in the case of VA-backed mortgages. A down payment of 20% or more on a conventional loan will eliminate the need for Private mortgage insurance. Our Agents can help you to determine just how much house you can afford, even before you speak with a loan officer. It's not official, though, until you get that pre-qualification You can, of course, arrange the financing through whichever institution you desire.
The obvious source of money for your down payment is either your savings account or the proceeds from the sale of a home that you already own. There are some other not so obvious sources of funds that may be available to you. In recent years, for example parent power has taken some new twists for first-time buyers.
Home Equity Loan -- Parents often have considerable equity built up in their own homes, and many of them are tapping that asset through home equity loans to make a gift to their children to make a down payment or to help with closing costs. If this is an option for you, it is important that you ask your tax advisor for up-to-date information on the tax implications for you or your parents. Lenders often will require a "gift letter" to verify that your parents dont expect repayment.
Shared Equity/Profit-Sharing -- In return for providing a part of the down payment, a home buyer's parents (or another investor) will share in the profit or net equity of the house when the homeowners eventually sell it.
Life Insurance -- If you have built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often, the insurance company will even charge a more favorable interest rate than rates charge for other types of loans.
Stocks and Bonds -- If you feel that the current state of the market doesnt favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security.
Company Profit Sharing or Savings Plan -- Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.
Did you know that Private mortgage insurance can reduce your down payment? If you obtain a conventional loan, you may make a down payment of 5% or less. Through the lender, you will be required to buy Private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, allowing the lender to approve a larger loan amount. Private mortgage insurance offers a variety of payment options. You may make an initial payment at closing and monthly payments with the house payment. You may make only an initial payment or only monthly payments. You may even increase your interest rate and have the lender pay the insurance. Be sure to ask your lender for a comparison of the benefits of each of these plans.
The larger the down payment, the less money you need to borrow. This means a lower monthly payment. However, remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies, and other miscellaneous items. So dont plan to put your last penny down on the closing table. New types of mortgages exist that feature help for first-time buyers and flexible terms for current home owners. These help home buyers to afford more house and to buy sooner by expanding qualification criteria.