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Preparing to Successfully Buy A Home

Posted by The Atlantic Real Estate Team on Thursday, June 10th, 2010 at 4:48pm.

Many times buyers begin looking at homes prior to knowing what they qualify for, what the mortgage payment would be for the home they are interested in, or liquidating the cash necessary for down payment or full payment. A lack of this type of ground work can result in challenges with the home buying process. Financial preparation is essential to being a powerful and successful home buyer.

Preparation is vital even if you will be buying with cash.

Did you know that in order to make a cash offer on a distressed property, the bank will require that a proof of funds letter accompany the offer? A proof of funds letter must generally be on bank letterhead, dated within the past 30 days, state how much money is available to purchase a home, and be signed by a bank representative. At times, a cash buyer can quickly find a property they want to make an offer on but when they need to produce a proof of funds letter, realize they must first transfer money between accounts and wait for the funds to be posted.

If you will be financing, being pre-approved is important for a number of reasons.

Distressed properties are currently a large share of the Volusia County real estate market. This is great news for buyers as prices can be quite low but did you know that the best deals out there generally receive multiple offers in a short amount of time after being listed? In order to make an offer on a short sale or foreclosure, almost all banks require that a pre-approval letter accompany the offer. A prepared buyer already has the pre-approval letter in hand to be able to quickly compete with other offers.

A pre-approval reinforces your position to the seller as a serious buyer. It can also provide you power of negotiation. A seller will generally choose to accept an offer from a buyer who is pre-approved over one whose financial situation is unverifiable. A seller does not want to start packing or even purchase another home then come to find out the buyer must back out of the offer due to not getting approved for what they thought they would.

Pre-approval will save you time and energy by determining your price range based on your down payment and how much you are comfortable with as a monthly payment, therefore narrowing your search parameters. Finding the home of your dreams will be a much more enjoyable experience if you efficiently and effectively utilize your house hunting efforts.

If you have not bought a home in a number of years, things in the financing world have drastically changed! The expectation of wrapping closing costs into a mortgage is no longer realistic. 100% financing is nearly unheard of. And in order to complete the loan process, even the most qualified of borrowers will face a myriad of financial verification requirements throughout a number of rounds of verification questions. Getting pre-approved will help you understand how the bank now conducts financing: 

The broad rule of mortgage affordability

You can typically afford a home priced two to three times your gross annual income. If you make $100k, you can typically afford a home between $200k - $300k. To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and association fees if applicable, as well as costs specific to your family, such as other bills and day care costs. 

Down payment is a factor

The higher your down payment, the lower your monthly payments will be. If you put down at least 20% of the home's cost, you may not have to purchase private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment. Conversely, the lower your down payment, the higher the loan amount you will need to qualify for and the higher your monthly mortgage payment. 

Consider overall debt

Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest, taxes, and insurance shouldn't total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn't exceed 41% of your gross annual income.                                               

So, if your gross annual income is $100k, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of approximately $2,333. Next, add the total of all your monthly bills including your potential mortgage and make sure they don't exceed 41%. 

Use your current monthly payment as a guide

The tax benefits of homeownership generally allow you to afford a mortgage payment, including taxes and insurance, of about 1/3 more than your current rent payment without changing your lifestyle. Multiplying your current rent by 1.33 will help you arrive at a rough estimate of a comfortable mortgage payment.  

For example, if you currently pay $1,500 per month in rent, you should be able to easily afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership. However, if you are struggling to keep up with your rent, consider what amount would be comfortable and replace with that amount for the calculation.

Also consider whether or not you plan to itemize your deductions. If you take the standard deduction, you cannot additionally deduct mortgage interest payments. We recommend you consult your tax advisor as they can determine what would be best regarding your specific tax situation.

We strongly recommend starting the loan process if you haven't done so yet. We can provide you a list of reputable lenders that have experience with your specific home buying situation. Contact us today!

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