So, you’re ready to buy your first home? This is one of the biggest and most exciting purchases you will make in your lifetime! But before you get caught up in all of the excitement of hitting the streets with your real estate agent, let’s make sure that you’re adequately prepared.
Lenders, lawyers, and real estate agents will expect you to have a reasonable understanding of the home-buying process. Remember, the more informed you are, the better off you will be. Here are a few terms that you should familiarize yourself with.
- PITI stands for principal, interest, taxes, and insurance. A monthly mortgage payment isn’t just the principal and interest on your loan, but also property taxes, homeowner’s insurance, and depending on your down payment amount, private mortgage insurance.
- Private mortgage insurance (PMI) is insurance coverage that homeowners are required to have if they’re putting down less than 20% of the home’s cost. Basically, PMI gives mortgage lenders some backup if a house falls into foreclosure because the homeowner couldn’t make their monthly mortgage payments.
- Debt-to-Income (DTI) ratio is all your monthly debt payments divided by your gross monthly income. This number is one-way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
Mortgage Payment Ratios – The Rule of 28:
A mortgage payment ratio isn’t about the maximum amount you can borrow based on your income; it’s about what you can comfortably afford. To get an idea of how much you can afford, take whatever you make each month, before taxes, and multiply that by 28%. That’s approximately how much a manageable PITI monthly payment for you might be. Don’t forget to include all sources of income. Below are some examples of income you need to consider.
- Co-Buyer’s Income
- Investment Income
- Trust Funds
- Rental Income
Setting a Budget:
Now that you know some of the common terms you’ll be hearing over the next few months, it’s time to determine how much of a monthly mortgage payment you can comfortably afford. Even if you’ve been prequalified for a mortgage amount, you’ll want to make sure that payment will comfortably fit in with your lifestyle, without putting any other financial plans on hold. It’s time to make a budget.
- Step 1: Know your income and expenses. Add up your monthly expenses, and deduct that amount from your net monthly income.
- Step 2: Set your priorities. If you need more room in your budget, then separate your expenses into “needs” and “wants” categories.
- Step 3: Track your spending. Keep track of where your money goes every month and balance your budget.
Debt-to-Income (DTI) Ratio:
A good benchmark for your DTI ratio is to spend no more than 36% of your gross monthly income on your total debt, including your mortgage payment and other debts such as car payments, credit card payments, and student loans. If your DTI ratio is above 36%, you may want to consider a lower mortgage payment.
- Example: If you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000)
Your home isn’t just a place to live, it’s an investment and a future for you and your family. We understand that home buying can become overwhelming. Every mortgage is different and has its own style. Our goal is to save you time and money while simplifying the process along the way. Contact one of our experienced mortgage loan officers today to help get pre-approved and get you into your dream home.