As the year comes to a close, it’s the perfect time to start setting goals for the new year. If one of those goals is adding to your key ring and purchasing a new home, there are some things you need to take a look at, and some habits to start building.
Look at Your Debt
There are two main things a lender will look at when deciding whether to approve your loan request: your gross income and your debt ratio. The debt ratio is calculated by adding up all debt that shows up on your credit report along with any taxes and insurance on real property and dividing it by your income. GreenStone requires a debt ratio of 40% or less. That’s why it is so important to know how much debt you have outstanding on your credit report and how much any real estate taxes and property insurance may be so you can determine if it’s a feasible time to take on more debt, and if you will qualify for a mortgage loan.
To figure out how much debt you have accrued, you can download your report from each of the three credit bureaus for free once a year at https://www.annualcreditreport.com/index.action. We recommend downloading a report from one bureau every four months, as opposed to downloading all three at once. This allows you to monitor your credit and open accounts throughout the year to make sure there are no surprises at year-end.
If your debt ratio isn’t favorable and could be worked on before applying for a loan, make that a goal for the new year. Set aside money from each paycheck to chip away at your currentdebts before taking on more.
Evaluate your Savings
When buying a home, you will need a down payment to secure a loan. If you are able to put down 20% or more to your lender for a primary residence, you can avoid paying Private Mortgage Insurance, or PMI. PMI is required by almost all lenders if you are putting less than 20% down minimum on a primary residence purchase. If you are unable to provide a 20% down payment at signing, you will need to tack on the expense of PMI, which can be up to a couple hundred dollars per month additional on your monthly mortgage payment.
The easiest way to start building your savings for that down payment is simply by paying yourself first. Determine how much you can afford to pay yourself from each paycheck, put that money aside in a separate bank account you don’t regularly access every time you are paid, and do your best not to withdraw funds from it. For example, if you know you need $12,000 by the end of the year to secure a loan the following year, and you’re paid bi-weekly, put about $462 away each paycheck into that separate account.
It's also a good idea to deposit any additional income you may get into that account including gift money, cash from a side hustle and bonuses from work. The faster you get to your savings goal, the faster you will be unlocking the front door to your dream home.
It's important to note: PMI is not available for secondary residences and recreational land. If you plan to make this type of purchase, you will need the full down payment of 20% minimum in full no matter what.
Other Things to Consider
As you plan for the exciting step of acquiring a new home, before you book the moving truck, there are some other things to think about and plan for:
- If you’re currently renting, you should know that just because you are paying $1,500 a month in rent does not mean you will automatically qualify for a $1,500 house payment. That’s because mortgages are regulated by the federal government, and rent prices are not. All federally regulated lenders are required to run an affordability test for mortgage payments when you are purchasing a home. Landlords are not required to go through an affordability test for rent.
- There are additional costs to add into your future budget on top of your house payment, like homeowners’ insurance and real estate taxes. Read more about the costs of owning a home in this article.
- There are creative ways to save extra cash to get you closer to your savings goals, including no-spend months. Read some of those strategies in this article.
- Talking to a lender, even before you’re ready to apply for a loan, is a helpful step to set expectations for yourself and plan for your goals.
Your Future Starts Now
GreenStone is here to help you strategize for your long-term ideas and goals. Reach out to your local branch to get connected with one of our experienced and knowledgeable financial services officers. They can take a look at your individual situation, walk you through what to expect from the loan application process, and let you know what to have ready for submitting a loan request.
