You have decided to buy a house! Yay, good for you! But do you know the first steps you need to accomplish to actually make your dream happen? My recommendation is to figure out your budget. This isn’t the first real, physical step but before that, you should try and decide what you can comfortably pay each month. You need to be able to make the payments as if you were renting. You have to pay the mortgage back in the time frame they allow. (I am sure you knew that, but wanted to reiterate just in case!). Try to factor in all of your monthly expenses and subtract from your income to see what you could reasonably pay each month. Make sure to keep some extra money for savings and your emergency fund, this isn’t a hard and fast rule but the responsible part of me urges you to do so!
Okay, reality is now setting in, you have to get pre-approved by a mortgage lender. This is an important step because you need to bring your pre-approval letter to the agent of your choosing. You can find the realtor first but all they will do is set you up with a lender before it goes any farther. And finding your realtor first is great if you want their opinion of who you should use! Now all of this boils down to your debt to income ratio. This is a fun way to say what’s possible for you to pay with all of your debt combined, against what your income is. From Consumer Finance they give a quick and great description:
“Your debt-to-income 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.”
This ratio impacts the type of loan that you can have, a lower debt to income ratio, can allow you potentially more favorable loan terms. And of course, in simplistic terms, the better the ratio the better the interest rate and more money to buy a home. Better ratio does mean lower percentage. The higher the resulting percentage the harder it will be to get a loan. This is why planning for a home can take years, to 1. Lower your debt and 2. Raise your credit score. Generally, the two of these go hand in hand.
This is the most basic way of explaining Debt to Income Ratio. Lenders can get into this with more detail. I will leave it to them because they know they’re stuff! And my blog isn’t about being the most detailed but explaining a complicated subject in simple terms. I hope this gave you an easy start to looking for a home! (Call us at 512-483-6000!).