Ok, your dream home may look like that photo .. but that may be off in the future
somewhere! If you're a first-time home buyer loan originator Mike Tizzano has
some advice for you about how much to spend, where to start, and more .. I spoke
with Mike for our Valley Views public affairs show ..
In today’s housing market, there are so many questions as to what to do. There are tons of great homes on the market, but there aren’t always great homes for you or great homes in your price range. So how do you know how much house you can actually afford?
Mike Tizzano of Fairway Independent Mortage has a look at 4 things you need to consider when making that leap:
- 1. Don’t rule out a starter home: With all the shows on cable TV about fixing, flipping, etc. there often unrealistic expectations with first time home buyers. We are currently in a seller’s market so you’re not likely to get everything you want in your first home without stretching your budget.
- 2. Know your budget: And make sure it’s your current budget. One of the issues prior to the crash in 2007 was that many homeowners were projecting either future income or future equity. That is a recipe for disaster. Regardless of your long term plan you need to understand that things change, both in the markets and your personal life. Make sure you can handle whatever home payment you get into at your current employment and income. Understand that even with a fixed rate mortgage your payment can increases as property taxes and homeowner’s insurance can fluctuate.
- 3. Understand debt to income ratios (DTI): Debt to income (DTI) ratio is monthly debt/expenses divided by gross monthly income There are two numbers here to consider. The “front-end” ratio, which is your housing expense, and the “back-end ratio” which is the housing expense plus other monthly debts. The other monthly debts are the minimum payments on items on your credit report, tax liens, child support and alimony payments, etc. So while some programs will allow you to qualify for a loan with a DTI of 55% it’s usually a bad idea when you consider what is not considered in the lender’s debt to income calculation:
- a. Income Taxes- Your DTI is calculated on gross income
- b. Health Insurance
- c. Auto Expenses such as maintenance, insurance, gasoline
- d. Utilities such as electricity, gas, cable/internet, cell phones
- e. Groceries
- f. Child Care or pet care expenses
- g. Emergency expenses
- Generally the guidelines call for a debt ratio maximum of 28/43. This means that the housing expense can equal 28% of your gross monthly income while the total debt ratio equals 43. BUT generally home buyers can be approved at ratios of 43/55. There are instances in which this is useful, such as if you have someone living in the home that is not qualifying on the loan but earns income. However, if all of your earned income is being considered going to those levels on your debt ratio is a terrible idea. Just because you can doesn’t mean you should. Don’t follow Jimmy off the bridge.
- 4. Make sure you have some funds available after closing: Let’s say you’ve saved up $40,000 to put down on your house and you use it all to keep your mortgage payment within your budget. Sounds like a good idea right? But what happens when you close and decide you want to paint, buy a new refrigerator, need more furniture, or something breaks down in the house or your car? You end up putting things on your credit card and it costs you more. If you’re already at the top of your budget the increased credit card payments could be difficult for you to meet. Although most loan programs don’t require you to have cash reserves to close on a home that you’re purchasing to live in, it’s always best to have a bit of a nest egg. Consider putting less down if you can do so without busting your payment budget, or buying something priced lower that requires a lower down payment to meet your budgetary goals.