The best thing to do if you’re thinking of a home purchase is to get in touch with someone who can guide you. For many people, the path to homeownership starts with a life change: a marriage, move, new baby or new job, for example. Then it’s a few innocent clicks on a real estate website, or circles around property ads in the paper (just to ‘see what’s out there’). It’s a diversion every prospective homeowner enjoys from time to time, but without proper planning it’s essentially a useless psychological dance with the future. Before the rose-colored vision gets too refined, it’s best to back up and assess your personal financial landscape from a grounded perspective.
The best resources you have to help you navigate the homebuying process are the people involved in the transaction. Sometimes one person is your ‘go-to’ for anything and everything you might need to know; other times your best support is a team of specialists. Whether you prefer a one-on-one relationship or a group effort, take advantage of the knowledge homebuying experts have to offer. Here are some of your friends in the field:
- Loan Officer. Home loan officers (LOs) are trained to know every aspect of private real estate transactions. Along with virtues like honesty, transparency and work ethic, an LO’s success depends on their industry knowledge. Though they are not responsible for the underwriting process (when your loan application is assessed for risk), they are intimately familiar with how various factors within your financial landscape are 'scored'.
- Attorney. Your lawyer is a dedicated professional whose primary mission is to make sure every ‘t’ is crossed and ‘i’ is dotted. Though LOs are familiar with the technical aspects of the first-time home purchase, a lawyer can further unpack the assortment of fees and expenses that often accompany the transaction. This is important information to have, because many first-time homebuyers aren’t aware of certain taxes and title fees, for instance, that can add up and invariably affect budget calculations.
- Tax Consultant. The person who files your tax returns can often be helpful during a home purchase. For instance, the IRS incentivizes new home buyers by offering penalty-free IRA withdrawals for down payments (otherwise the typical penalty is 10%), and all homebuyers are eligible for tax breaks on mortgage interest and property taxes. (Consult your tax advisor for details.) To budget correctly, it’s important you have a thorough knowledge of federal mandates as they apply to homeownership.
- First-time homebuyer programs. There are a number of local, state and federal programs that make it easier for people to realize the dream of homeownership. Economic development organizations, philanthropic non-profits, housing trusts, and governmental agencies like the Federal Housing Administration (FHA) offer assistance with down payments, closing costs, and low-interest loans.
There are a few important concepts to keep you on the straight and narrow when it comes to creating your homebuying budget. There are exceptions to every rule and variables in every home loan application, but in general, it’s helpful to remember the following ideas when you sit down to figure out your figures:
- The 28/36 rule. This rule of thumb for conventional loans refers to the maximum percentage of monthly gross income you should spend on housing expenses (28%) and total debt (36%). The 28/36 rule establishes how easily you can afford a mortgage payment when considering the rest of your monthly obligations. Your CCM loan originator will advise you on your specific situation.
- PITI. Principle, Interest, Taxes and Insurance are the four components of your total monthly mortgage payment. Our online mortgage calculator will give you an idea of your PITI when you provide the essential numbers like first-time homebuyer down payment, home price, annual property tax, homeowners insurance and desired loan term.
- Self-employed? The freedom and satisfaction of self-employment are lifestyle rewards that can’t be quantified, though mortgage underwriters need additional information to verify your income. If you’re getting by on your own steam, good for you — just know your first-time homebuyer mortgage application may involve some extra documentation. Nothing too drastic; for instance, a 2-year income history is typically required.
- 50%. In most cases, this is the maximum debt-to-income ratio (DTI) you can have when applying for a conforming home loan. DTI is calculated by dividing all your monthly debt payments by your gross monthly income. If it’s below this crucial threshold, your homebuying outlook is bright. But don’t be discouraged! This is a case-by-case determination and can also vary by loan type.
