Are You Ready to Buy a home? If the answer is yes, the next question to ask yourself is, “What is the maximum amount I can pay for a monthly mortgage?”
Buying a home is a huge commitment. Not only are you agreeing to the financial obligations, but for most people, you’re agreeing to live somewhere for a set amount of minimum years. This could be 5 years (until you decide to resell the home and get your equity back), 10 years (based on certain mortgages and down payments), or, on average, 15 or 30 year mortgages. For most people, signing a mortgage signifies they have decided on a place to build their life.
The opportunity to choose and purchase a home is a requirement for many people, whereas other people may see home ownership as a dream that they have worked extremely hard to obtain.
Home ownership is a blessing. However, if you’re not financially stable to purchase a home, it can end up being costly and frustrating.
Hannon Properties LLC highly recommends purchasing a house that is within your budget. Based on your income, you may find that a fixed rate 30 year mortgage is the makes the most sense, however if you’re in a higher tax bracket, you may find that a 15 year mortgage is ideal, even though the monthly payments may be more.
Debt-to-income Ratio (DTI)
One major thing to consider when it comes to financing your home is knowing your DTI, or Debt-to-Income ratio. Ideally, your debt-to-income ratio will be less than 45% when you go to buy your home, however some lenders may approve those with a debt-to-income ratio of 45.1 – 50%.
The Federal Housing Administration states that 43% is the standard, and is used as a general guidline when approving mortgages. Based on your lender, they may approve a 43% DTI , however other lenders may see 43% as the maximum, and only lend to those with a DTI of 43% if their credit score is considered high, along with a perfect FICA score. Remember that being denied by one lender because your dti is 43% doesn’t mean that you’re not qualified to finance a house, it just means you will have to find another lender who is able to work with your current situation.
Hannon Properties LLC is an equal housing opportunity lender, and utlilizes the FHA standards as general guidelines for providing mortgages. The maximum DTI ratio you can have if you’re planning on getting your loan with Hannon Properties is a DTI of 48%, however we prefer you to have a DTI of less than 40%. We can work within that range; please keep in mind that our lender will make a decision based on several factors:
- Credit Score: A min. of 680 is ideal, however we are able to work with people who have a credit score of 630 if your DTI is lower than 35%.
- FICA Score – Your FICA score can be considered just as important, if not more important, than your Credit Score. Your FICA score is calculated based on your recent payment history, and provides a lender with details on your ability to repay debts on time. Having a low credit score, with a high FICA score, you’re more apt to be able to get a home, for the simple fact that if you make regular payments on time, however you have very little credit, you’re more apt to make those payments simply because you have a record of paying your bills on time. Talk with your lender to see how you can improve your FICA Score.
– Mortgage limits – When you apply for a home, remember that your mortgage shouldn’t equal more than 43% of your monthly gross income. Of course, it’s always better to attempt to get a mortgage that is less than 30% of your monthly income, however we understand that this can be a diffucult financial goal to reach.
What should I bring to my meeting with the in-house lender?
Before you can begin searching for a home to buy, it’s best to know how much you’ve been approved for. Schedule an appointment with our in-house lender to discuss the different financial options available to you. You may be surprised to learn that your income and DTI ratio qualify you for a $400k home, whereas you previously thought you’d only be able to afford a $249k dollar home. This could be the difference in a 15 year or 30 year mortgage, or a 3.5% down payment vs. a 20% down payment.
Things to consider
- What is my household’s annual income?
- What is my debt-to-income ratio?
- What is better for me, a 15 year mortgage, or a 30 year mortgage?
- Is this my first time buying a home?
- How much money do I have to put down on the home? Do I have at least 20% saved for a down payment?
- Am I eligible for any first-time homebuyer programs, USDA programs, or other federally funded housing programs?
- Am I interested in purchasing an existing home, or would I like a new construction home?
- If I am getting a new construction home, do I already own the lot?
- What is the primary function of this home? Will I be raising a family, using it as a second home away-from-home due to work? Is this my first home after graduating from college, and I’ll be living alone as a working professional? These are all things to consider when you go to talk to the on-site lender.
What should I bring when I talk to the in-house lender?
After you schedule you appointment with the in-house lender, there are several different documents that you will have to bring so the lender can verify and approve your application.
- Photo ID or Drivers License, Military ID, Social Security Card, Birth Certificate, sor US Passport
- Previous income statements for the last 5-7 years
- Current paycheck statements, or other income statements (including W2’s, 1099 forms, or tax returns)
- Proof of additional income, such as social security, retirement benefits, child support payments, military benefits, or dividends from stocks and bonds. Other forms of income may include royalties from books, music, movies, or other forms of entertainment, payments from inventions that you hold patents on, cryptocurrency returns, lottery winnings or lawsuit winnings that are paid on a semi-annual basis.
– A list of your monthly debts (including car payment, telephone bills, child support, credit card bills, loan statements, medical bills, etc)
What do Mortgage Lenders Want?
Ideally, when you apply for a mortgage, lenders prefer than your DTI ratio be less than 27%. What this means is if you make 10,000 a month, you shouldn’t have any more than $2,700 in bills a month.
Lenders prefer you have extra cash for emergencies. They don’t want to see that your bills are maxed out between your current debt, and the new responsibility of handling a mortgage. The reason being is that lenders know that life events happen – you may lose your job, fall ill and end up with medical bills, or end up with car problems. Lenders are aware that if 90% of your finances are going towards preexisting bills, the chances of you falling behind on your mortage are higher if you do not have the extra money to cover those unexpected expenses.
TIP: Just because you’ve been approved for a mortage of $2,500 a month doesn’t actually mean you can afford the payments. Remember to be honest with yourself. If you believe that a financial obligation of $2,500 is too expensive, talk to your financial advisor and real estate agent about finding a home with a mortgage that you are more comfortable paying. For example, if you were just approved for a 15 year mortgage at $2,800 / month, however you know that you’d be living check to check with very little money to put into savings, opt for a home with a mortgage that is closer to $1,500, or go for a home with a 30 year mortgage. Don’t accept the first offer on the table just because you got approved. If something happens and you lose your job, you want a mortgage that you can afford to pay if you took a pay cut.
Ideally, financial lenders love it when you come to the table with 20% down. The reason being is this prevents you from having to pay private mortgage insurance (PMI). Without the 20%, you can assume that you’ll be adding anywhere from $25 – $75 on your monthly mortgage payment for every $100,000 that you borrowed from the lender.
What are the benefits of a large down payment?
- Smaller monthly payments – Your monthly mortgage payments will be significantly less when putting down 20%, vs. the bare mininum of 3.5%. This can be the difference in several hundred dollars a month, based on your initial down payment, the length of the mortgage, and the interest.
- More lenders to choose from – A lot of lenders will not work with you unless you have a minimum of 10%. Hannon Properties LLC prefers anybody going through our in-house lender have a minimum of 9% down payment, although we may make exceptions based on your Credit Report, FICA score, & Job History.
If you don’t have 20% down to put on your initial purchase, that doesn’t mean you cannot get your new home financed. There are programs available through the Federal Housing Administration, such as an FHA Loan, that require as little as 3.5% down.
TIP: Even though you may benefit from a large down payment, don’t use your entire savings to use as a down payment. You don’t want to sacrifice your emergency funds for a new home. Talk with your financial advisor of the best plan of action, or get with our on-site lender to see what other options are available to you that won’t result in you spending your emergency fund on a down payment.
SHOPPING FOR A HOME
After you have talked with the in-house lender and have been approved for a mortgage, the next thing you’ll have to decide on is if you’re going to buy a pre existing home, or if you’re planning on building a new construction home