3 Must-Know Factors for Prospective Homebuyers
By Lucky Sandhu
A steep rise in home prices over the past six years has eroded home affordability for many first-time home buyers.?In addition, many renters are confronted with two additional financial challenges – rising rents and payments on their outstanding student loans.?Yet, the desire to own a home remains high among renters and even homeowners of all age groups. According to a NerdWallet survey conducted online by the Harris Poll among 2,051 U.S. adults from December 1-5, 2022, for the fifth year in a row, about 8 in 10 Americans (83%) say buying a home is a priority for them. About 28 million Americans, or 11% of them, were planning on purchasing a home in the next 12 months, according to the NerdWallet survey.
Further, according to the National Association of REALTORS? 2023 Home Buyer and Seller Generational Trends Report, younger homebuyers (Millennials and Gen Xers) cited a desire to home their own home, a desire for a larger home, a change in family situation, and job-related relocations as their primary reasons for purchasing a home. Meanwhile, the Boomer generation cited a desire to be closer to their family and friends, retirement, a better area, vacation or investment purchase, or even a desire for a smaller home as their primary home purchasing reasons.
Keeping in mind the high zest for homeownership amongst homebuyers from all different age groups, we provide three critical areas that will help all of our future homebuyers realize your dream of homeownership in a faster, cheaper, and more seamless manner.
1. Understand Your Affordability
Home affordability can be explained simply as the sum of your monthly savings (your earnings minus your expenses) plus your rent payment each month.
Affordability = Monthly Savings + Your Rent Payment Each Month
For illustration purposes, let’s say your joint monthly income is $9,000 each month and your total expenses are $6,500 per month.?We assume here that your expenses include rent, food, utilities, car payment, student loan payment, and any lifestyle-related expenses. Your total savings are $2,500 every month. Let’s further assume that your rent payment each month is $2,200.?The sum of your savings and your rent payment: $2,500 + $2,200 =?$4,700. This $4,700 is the amount you can afford to pay for your monthly mortgage-related expenses. We provide a breakdown of these mortgage-related expense categories under the section “Know the Costs of Homeownership.”
The key to achieving sound affordability is having or creating a disciplined approach toward saving each month. This may include curbing or avoiding altogether any expenses that you can.?This old adage applies strongly to enhancing your affordability towards your first home, “A penny saved is a penny earned.”
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2. Become a ‘CIA’ Expert
According to NARs Generational Trends Report, 98% of home buyers under the age of 36 financed their homes. Given that almost every young home buyer requires financing to purchase their home, it’s important that you have these three criteria of your financial profile properly addressed. Each of the criteria plays a significant role in your ability to secure home financing.
Credit?(C)?– Credit scores range from 300 to 850.?All scores above 700 are considered good. Most conventional lenders require you to have a minimum credit score of 620.?The government home financing agency – Federal Housing Administration (FHA) will allow you to have credit?scores as low as 580 to qualify for a home loan.
It is highly recommended that you maintain a good score because the interest rate you get on your home loan is directly linked to your credit score. A score of 760 and above normally allows you to get the best mortgage rates.
Reliance Financial ? Advisory Tip:?
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Have an experienced mortgage advisor review your credit profile with you.?They can recommend any discrepancies that may need to be fixed.?They can also uncover opportunities for you to improve your score to a higher number.
Income (I)?– The second critical criterion to get a home loan is making sure you have sufficient income to cover your housing expenses.?Three of the largest home financing agencies in the U.S. – Fannie Mae and Freddie Mac (conventional loans), and Ginnie Mae (FHA loans) will allow up to 50% and 55% respectively, of your gross income to be used towards your monthly housing expenses.?For example, let’s use the illustration in the “Understand Affordability” section.?If your joint monthly household gross income is $9,000, conventional lenders will allow up to $4,500 for use towards qualifying on your home loan.
Assets (A)?–?Having the right down-payment amount saved up is the third crucial criterion in securing a home loan.?The housing giants, Fannie Mae and Freddie Mac allow home buyers to put down as little as 3% on loan amounts up to $453,100 and 5 percent on loan amounts up to $679,650.?Ginnie Mae through its FHA loans allows for down payment of only 3.5% on loan amounts up to $679,650.
Reliance Financial ? Advisory Tip:?
You can have family members help you with the down-payment funds on most conventional and FHA loans.
3.?Know Your Costs of Homeownership
Owning a home comes with two separate two closing costs components:
Recurring closing costs are your ongoing monthly home-related expenses and can be broken down as follows:
Going back to our illustration above, in order to qualify for a conventional home loan, the total amount of all the above housing expenses cannot exceed more than 50% of your gross income – $4,500 in our example.
Non-recurring closing costs are one-time costs related to getting your home financing.?These fees can consist of an array of costs, including, but not limited to loan origination points, discount fees, escrow and title insurance fees, city transfer taxes, notary, and county recording fees.?The sum of these fees depends on your loan amount and the purchase price of the home you are buying.?These fees can normally range between 1% – 2% of your purchase price.
Reliance Financial ? Advisory Tip:?
An experienced mortgage advisor can help you provide a detailed breakdown of recurring and non-recurring closing costs. Utilize their expertise.?It doesn’t cost you anything, other than your time investment.
Conclusion
Getting savvy and serious about your finances today will fast-track you on the express lane toward your dream of homeownership. Your disciplined approach to your finances will enable your long-term financial success and freedom.
Do you have further or specific questions on getting ready for your home purchase??Contact us at (888) 973-5346 or email us at?[email protected] .?Our mortgage advisors at?Reliance Financial ?are dedicated to offering insights where you need them most and providing you with personalized step-by-step guidance toward homeownership.