Welcome to the fourth post in a series of 7 posts covering the more important issues about buying a home in Northern Nevada.
Whether you’ve owned a Northern Nevada home before, or you are a first time Northern Nevada home buyer, having a Buyer’s Guide can be a very helpful tool before, during, and even after the homebuying process.
Since most people don’t buy and sell homes every month, let alone every year, we have put together a fantastic 36-page “Just For Buyers” Guide.
In this post, we’re going to discuss “Get Your Finances In Order” and “Think Like a Lender: Let’s Do The Math”.
Get Your Finances In Order
Unless you’re independently wealthy, it’s likely you’ll need a loan from a bank in order to purchase a home. Since you’re going to need a loan, it’s a good idea to get your finances in order when you need them to approve you, they will.
- Develop a family budget. Instead of budgeting what youâ€™d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.
- Reduce your debt. Lenders typically look for a total debt load of no more than 36% of income. This figure includes your mortgage, which usually ranges between 25-28%. You need to get the rest of installment debt â€“ car loans, student loans, credit cards â€“ down to 8-10% of your total income.
- Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. Youâ€™ll probably see some great ways to save.
- Increase your income. It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want.
- Save for a down payment. Although itâ€™s possible to get a mortgage with only 5% down â€“ or even less in some cases â€“ you can usually get a better rate and a lower overall cost if you put down more. Shoot for a 10-20% down payment.
- Create a Northern Nevada house fund. Donâ€™t just plan on saving whateverâ€™s left toward a down payment. Instead decide on a certain amount a month you want to save, then put it away as you pay your monthly bills.
- Keep your job. While you donâ€™t need to be in the same job forever to qualify, having a job for less than 2 years may mean youâ€™ll have a higher interest rate.
- Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills. Pay off balances promptly.
Think Like A Lender: Let’s Do The Math
There are specific math formulas that your lender will use to assure you are qualified to purchase the home that you want. Hereâ€™s how to figure them for yourself:
1. Â Â GDSâ€¦â€¦also known as your Gross Debt Service ratio.
GDS = Annual Mortgage Payments + Property Taxes
Gross Family Income
2.Â Â TDSâ€¦â€¦also known as your Total Debt Service ratio.
TDS = Annual Mortgage Pmts+Property Taxes+Other Debt Pmts
Gross Family Income
3.Â Â Â 28/36? â€¦â€¦â€¦â€¦â€¦ Calculate your maximum monthly mortgage payment (MMMP). These guidelines are conservative and sometimes can be stretched to 29/41 and are multipliers. The first refers to income only and the second refers to income less debt.
28% MMMP â€¦ Total Monthly Gross Income x 0.28 = _________
36% MMMPâ€¦ (Total Monthly Gross Income – Debt Pmts) x 0.36 = ________
4.Â Â Â Â Maximum Mortgage Amountâ€¦â€¦this is the maximum amount of mortgage you will qualify for from a lender (MMA).
MMA = (MMMP x 152) = ___________________
5.Â Â Â Â Add Down Paymentâ€¦â€¦what is the total amount of money you plan to put down?
MMA + Down Payment = _____________________________
Maximum Purchase Price
In the fifth post in this series, we’ll discuss “What to Expect When Writing the Offer” and “What Your Northern Nevada Home Inspection Should Cover”. If you’d like a FREE copy of our complete 36 page Northern Nevada “Just for Buyers Guide” just let us know. We’re happy to provide you with one to assist you on your road to home ownership.