When it comes to making that move, either into buying a home for the first time, or moving up into another home, you'll need to establish a solid plan for yourself.
Determine Your Financial Situation
You need to determine whether you have enough money saved up to cover the down payment and the closing costs, and whether you'll have enough income to cover the new mortgage payment and all of your other bills. This will determine the price range of a home which you're capable of buying.
Once you have a realistic target in mind, you can start working toward an actual goal. This involves three views:
- Your income -- This includes all income, from all sources, less any taxes you’ll owe on that income.
- Your assets -- This includes only highly liquid assets – in other words, money in checking and savings accounts, stocks and bonds, mutual funds, etc. It does not include assets held in IRAs or 401(k)s.
- Your liabilities -- This includes credit card debt as well as monthly payments, such as automobile loans, or alimony payments.
This will enable you to determine how much you can afford right now as a down payment, and how much you can afford as a monthly mortgage payment. The difference between where you are now and where you want to be is what you need to work on.
Your loan officer will be happy to help you determine your monthly mortgage payment. As a Nestablish customer, you can also use the free Nestablish mortgage calculator, which is specially designed to determine the total monthly payment a buyer can expect, by taking into account mortgage insurance, real estate taxes, HOA assessments, homeowners insurance, and other factors. This is a great way to determine your price range, based on your budget and your ability to pay the mortgage each month.
There are two steps to take in order to get from where you are now to where you want to be:
- Increase your savings, if necessary, for the down payment. Figure out exactly how much extra you need, how long you have until you actually want to purchase a home, and simply divide the total you need to save by the number of pay periods you will have between now and then. For example, if you need to save $5,000, are paid bi-weekly, and you want to buy a home in one year, you will need to save approximately $200 each pay period.
- The second step is to figure out by how much you need to reduce your regular monthly spending in order to be able to afford the monthly mortgage payment. Start by creating a budget, and grouping your spending into categories such as eating out, entertainment, utilities, etc. Then figure out where you can cut back. For example, ask yourself how much you are spending on gifts. Consider making some presents instead of buying them. Are you spending a lot on phone calls or your cell phone bill? Try to call during cheap or free rate times, and take a close look at your cell phone bill to determine whether you can cut back on some of the features for which you are being billed; use e-mail more.
It is never easy to cut back, but sometimes the only way you’ll be able to afford the home you really want is if you figure out where you are right now, and make the adjustments that will get you to where you want to be. If you already have a mortgage payment, simply increase the amount you allocate to make your current payment to the amount of the predicted monthly mortgage payment, and save the difference.
You should also calculate your debt-to-income ratio, which shows the amount of your income that goes toward paying your debts. The higher your ratio, the less likely you will qualify for a home loan. This can help you determine whether you can get a mortgage before you spend time searching for your home. If your debt-to-income ratio is more than 36 percent, you should think about getting out of debt, or at least reducing your debt immediately.
Please visit the following blog posting and read the article titled "Calculating Your Debt Ratio" to find out how to calculate your debt ratio:
https://blog.nestablish.com/home-buyers/debt/.
Review Your Credit
Your mortgage lender will obtain copies of your credit report and credit score to determine how much they're willing to loan you. It makes sense to conduct your own credit review, long before you submit your first mortgage application. Please visit the following blog posting and read the article titled "Credit Scoring Models" to find out how to get your credit score and your free annual credit reports:
