For many years now, we had lived in a relatively great time to purchase a new house. As of recently with the federal reserve increasing interest rates, the 30 year mortgage has spiked to multi decade highs! Now, more than ever, it is important to understand these tips and tricks to buying a new house.
Determining how much you can Afford
As a general rule, when you look to purchase a home, there are a few calculations you should know when buying a home. First, we need to determine how much you should spend monthly on your housing. 28% is the sweet spot. When calculating your monthly budget, we begin by taking your gross income (income without deducting taxes). This can be found from a pay stub or from your most recent tax return. When you find that number, multiply it by .28. Example: You and your spouse both make $150,000. ($150,000 x .28)= $42,000. This number gives us the $42,000 per year to spend on housing. Now, divide that number by 12 (12 months in the year)= $3,500 per month.
What does this $3,500 cover? This $3,500 should cover your mortgage Principal, Interest, Taxes, and Mortgage insurance.
The second, number you want to look at is 36%. This number includes the original 28% we just calculated PLUS any monthly payments on debts. Debts can include: Credit Cards, Student Loans, Personal Loans, Car Payments, etc. If you keep this under 36% you are in good shape.
Determining the Best Lender:
The good news is that you have options when looking for a new home. Certain lenders have different programs which can help you tailor the best mortgage for you. For instance, perhaps you don't have a lot of money to put down. Certain lenders can require as little as 3% down when purchasing your home. Certain lenders are better at dealing with first time home buyers. Some lenders are better at dealing with refinances where others are better at dealing with first time home buyers. Don't be afraid to shop around!
Finding the right loan:
Jumbo vs Conventional Loans. These are two types of loans you have likely come across in your research.
Jumbo loans are generally for individuals who are looking to purchase a home outside of traditional lending limits. Jumbo loans have more stringent requirements for qualification. They can require high credit scores, higher cash reserces, potentially greater down payment (more than the traditional 20%). For meeting several of these more stringent requirements, you can potentially be rewarded with a more favorable rate (in some cases) as well as a higher borrowing limit. This loan is ideal if you are "reaching" for your dream house.
Conventional Loans are generally your traditional loan that you would get from a lender. These generally have the requirements we posted above and give you the option of 30 or 15 year fixed or variable loans. Most likely, these are the loans you will be dealing with.
Finding the right house:
Before you go shopping for that house, a great idea is to have a preapproval letter. A mortgage preapproval letter is a lender's offer to loan you a certain amount of money for your mortgage. It helps to display that you are a serious buyer and can meet the obligations of your negotiated price!
Get a home inspector! Home inspectors can help to inform you of any major issues with your potential new home. These can include tests of radon, most and pests. Inspections of the roof, crawl spaces and any potential foundational issues. This is generally well worth the price!
First Time Home Buyers
There are many national and state home buyer programs available! Make sure to ask if you are eligible. Below are some that may be applicable to you!
Homebuyer Dream Program: First time home buyers who earn 80% of the area's median income and purchase a home in New York, New Jersey, Puerto Rico, or the US Virgin Islands. The grant offers up to $10,000. ($9,500 toward down payment and $500 for closing costs).
VA Loans: The US Department of Veterans affairs helps service members, veterans and their spouses purchase homes. They generally provide lower interest rates and require no down payment or mortgage insurance. Typical requirements are credit scores of at least 640.
USDA Loans is a zero down payment mortgage for eligible rural and suburban home buyers. There are income restrictions which can be different for each region and generally have a zero down payment requirement.
Disclaimer: As always we recommend talking with your financial advisor or mortgage broker before determining which route is best for you. If you have any questions please feel free to contact us with any questions.