Lois Marris | RE/MAX Results | Lois.Marris@Results.net
Before the open houses. Before the home tours. Maybe even before you decide on a real estate agent. Right when that "I'd like to buy a home someday" thought goes through your head. That is the right time to begin planning your home purchase.
There are a lot of things you can do months and years ahead of your home purchase to make things go smoothly when the time to buy is right. Find Rochester MN homes for sale here
FIRST: Calculate your Debt-to-Income Ratio
First things first! To get a home mortgage you'll need to know your debt-to-income ratio. It's one of the primary things a lender will look at. Too much debt means no loan.
Debt-to-income ratio of 36% or lower is ideal, up to 43% is okay, higher is possible but probably not financially healthy for you. Here's why.
Don't worry! If you have a higher debt-to-income ratio you may still qualify for a loan. Over time, you can also improve your debt-to-income ratio by paying off some debt or increasing your income.
To calculate your Debt-to-Income Ratio simply divide your total monthly debt by your total monthly income.
This debt-to-income ratio shows what portion of your income is used to cover all of your monthly debt payments including car loans, student loans, credit card payments, plus your estimated mortgage payments, property taxes, home hazard insurance.
High student loan debt? Some mortgage companies will not consider your student loans as debt, depending on your profession and the estimated potential salary for your field (medical, etc.)
FREE DOWNLOAD HERE : Your home loan toolkit
SECOND: Define what "Affordable" means to you
Use our mortgage calculator to get a quick idea of estimated mortgage payment amounts for different priced homes. Be sure to include property taxes, estimated home insurance fees and association fees. Most buyers get a 30 year mortgage. Most mortgage companies want to see from 5-20% as a down payment but sometimes there are 0% down payment loans available. Your lender may require you to buy mortgage insurance, an additional cost, if you put less than 20% as a down payment.
A mortgage lending rule of thumb is that your total monthly home payment should be at or below 28% of your total monthly income before taxes.
Use the mortgage calculator to show you an estimated monthly payment for your dream home.
Payment to high? Then look for a less expensive home, put more money down or wait for the interest rates to drop.
THIRD: Know your credit score
You can request a free copy of your credit report once a year from all three major credit reporting agencies. Get your credit report at annualcreditreport.com and check it for errors. If you find mistakes, submit a request to each of the credit bureaus asking them to fix the mistake. It will take at least 30 days for any correction to make a difference to your score so start this process well before you need your mortgage.
Do what you can to get your credit score to 700 or above. Anything less than that will likely cost you a higher interest rate which will cost you lots of money over the years. You can get a loan with a lower credit score and it's up to you to decide if that makes sense for your situation or not, often times it does!
FOURTH: Calculate cash needed and start saving
Buying home a has some obvious costs and a few not so obvious costs. Your mortgage company may have an origination fee, you'll have to get a plat drawing of the lot, an appraisal of the home's value, pay to record a copy of the mortgage at the county courthouse, pay the title company, etc. You'll often pay for the first year home insurance up-front with subsequent payments being paid from an escrow account managed by your lender. Most of these types of costs can be bundled into what we call "closing costs". It's been my experience around Rochester that 3% of the sales price is a good estimate of the closing costs not including the home inspection and first year of home insurance.
Home purchase price $250,000
Down Payment (10%) $25,000
Mortgage amount $225,000
Closing costs (3%) $7,500
Estimated cash needed to close: Down Payment + Closing Costs = $32,500
Remember, you can decrease this amount of cash needed by lowering your down payment. If the local market will bear it, we can sometimes negotiate to have the seller pay a portion, if not all, of the buyer's closing costs. In Rochester, seller paid closing costs is still fairly acceptable in the under $200,000 price range and gets less acceptable as home prices increase.
I'm so proud of you for reading this entire article! It shows you are serious about buying a home and doing the proper research to get yourself off to a very healthy start!
Find homes for sale in Rochester, MN at www.RochMNHomeSearch.net
I'm happy to answer any questions you have, no matter where you live in the United States. Just ask in the comments below or email me at Lois.Marris@Results.net.