There are many factors you need to consider when shopping for a home; how much you can afford is likely at the top of the list. Your budget affects your choice of home, the neighborhood it is in, size and other features. Your financial situation is also a deciding factor on which type of financing will work for you.
Lenders will look at more than just income when considering you for a loan and determining the size of a loan you can qualify for. You may find some creative financing options that help boost your purchasing power.
Pre-Qualification or Pre-Approval
New homebuyers can have their real estate agent or lender pre-qualify them for a loan. This is a quick process that can give you an idea as to the amount of a mortgage you can afford. Pre-approval is a more formal process where a lender verifies all data and agrees in advance that you are qualified for a specific amount. A pre-approval document is much better than a pre-qualifying letter when demonstrating your strength as a homebuyer.
Important Factors to Lenders
Lenders will use several factors to determine how much money they will loan you, including:
• Gross monthly income
• Credit history
• Outstanding debt
• Savings
• Your choice of financing
• Current interest rates
Lenders will gather your financial data to calculate two important ratios; your debt-to-income ratio and your housing expense ratio, to determine how much they will loan you.
Debt-to-income ratio is your total monthly debt (car payment, student loans, credit cards, etc…) compared to your total gross income. Lenders like to see monthly debt at no more than 36 percent of gross monthly income.
Housing expense ratio is the amount of your mortgage payment compared to your gross monthly income; your mortgage payment should not be more than 28 to 33 percent of gross monthly income.
Lenders may be more lenient with the ratios if the buyer can make a large down payment. Many mortgage terms are negotiable. There are other ways you can improve your purchasing power.
Gifts are nice! Lenders will allow you to use gift funds for your down payment. A friend or relative can give you the money and sign a gift letter which states that the money is a gift, not a loan that must be repaid.
You can negotiate closing costs; a good real estate professional will provide advice on this and include seller concessions in the purchase agreement. Seller concessions are when the seller agrees to pay a certain amount of allowable closing costs.
There are many government loan programs with special terms to help first-time homebuyers qualify. Some may include reduced interest rates, lower or no down payments and other helpful features. Your real estate agent and your lender should be able to provide information on the various loan programs available to you.
The various loan types with long or short terms, adjustable-rate or fixed interest rates should be considered depending on your mortgage needs. There are significant differences between different loan types that can make one more beneficial than another depending on your individual situation.
Mark Goedert of Goedert Real Estate specializes in working with first-time homebuyers. He assists his clients in choosing the right home and the financing that works best for them. Home buyers who work with a Goedert agent are well prepared to make great decisions based on advice from an experienced real estate professional.
Mark Goedert works with first time home buyers in Marshall, Albion, Okemos, Mason, Rockford, Tecumseh, Brighton, Warren, Temperance, Royal Oak, Ypsilanti, Livonia and other cities and communities in South East Michigan.
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