I work with lots of buyers, and many of them are first time home buyers, here in the Richmond VA area! One of the biggest fears they have, especially after going through the downturn of the last years, is buying a house and then having a mortgage that is too big for them! And, as the market here in Richmond continues to tighten, buyers are finding that they have to pay more and more for a house, which, of course, increases their payment!
Of course, the lender you use is going to run some numbers and they are not going to allow you to borrow more than you can afford! But what a lender thinks you can afford, and what you may think you can afford, can sometimes be two different things!
Most lenders will use a 28/36 rule when qualifying you for a mortgage. The "28" is the percentage of your gross monthly income that you can use to allocate towards your monthly housing expenses (principal, interests, taxes and insurance). So if you are making $3,000 per month (before taxes), then your mortgage payment (Principal, Interest, Taxes & Insurance) should not exceed $840/month!
Then the lender is also going to look at the "36" - which is the total debt that the lender says you can carry. This means that you can't carry a total monthly debt of $1,080! So, again, if you are making $3,000 per month (before taxes), then your total debt, including the mortgage payment, cannot exceed $1,080/month.
If you are thinking of buying a house in this tight market, what does this mean for you?
(1) Pay down some debt! If you have been thinking of buying a new car (and taking on a new car payment), perhaps it would be better to wait until you have bought a house! If you have student loans, talk to a lender who can give you some great ideas on what you can afford & how student loan debt affects you! And if your credit card balances are high, perhaps you can work to pay down some of the credit cards!
(2) Look for ways to come up with a larger down payment! A larger down payment means that your principal balance will be smaller, which means that your monthly mortgage payment will be smaller. If you can afford to come up with a 20% down payment, that would be great, since it not only means that you will be financing a smaller principal balance, but you will also be getting rid of the mortgage insurance! If you are a first time homebuyer, there are down payment assistance programs that could help! If you are a first time homebuyer in Virginia and you are getting married, one idea would be to use any money received from your wedding to help fund a first time homebuyer account!
(3) Gift Money! Did you know a parent could possibly help you out with a gift? Are you a favorite relative? If so, you may be able to ask them to help with your down payment! There are tax laws that allow a relative to gift you money without any tax consequences to either the recipient or the giver (but you need to check with your tax accountant about the laws as I am not a tax accountant)!
(4) Get a second job! If you have a second job that you have been working at for some time, that will boost your income and allow you to qualify for a higher mortgage payment! But the lenders will have some requirements on how they will count that second job income, so make sure you talk to them about how long you need to be working at your second job for that income to count!
(5) Look at different loan programs! If you are a veteran, there is the VA loan you may be able to use to buy your home! This loan allows for 100% financing AND no mortgage insurance! Or if you are looking at a property in a more rural area, then the house may qualify for Rural Development Financing, which is also 100% financing! And then there are other programs which will eliminate the mortgage insurance! Again, talk to a lender to find out about the various financing programs that may be available!
(6) Compromise on some of the things you want in your new home! Buying a home is often a compromise! Everyone wants that dream house, in that dream location, with everything already done & in perfect condition that they can live in until they carry you out in the box! But in a tight market, like we are now seeing, sometimes at the price you can afford - or the price you are comfortable paying - you may not get everything you want! Sometimes you may need to compromise on what it is you can get in a house! If you don't like the paint colors, you can always repaint! If you don't like the flooring, you can always change that! If there is no central air, it can always be added after closing! But what you can't change is location! And sometimes that location comes with a premium!
Buying a house, especially if it is your first home, can definitely be a bit scary! But it can also be exciting! The housing market has done a lot of healing since the downturn of 2006 - and many changes have been made to help buyers not to overextend themselves! But that concern is still there! Talking to a lender is the first step to take - even before you are ready to begin that journey towards home ownership! It will allow you to know what you need to do in order to be ready to buy when you find the perfect house!
Thinking of buying a home? Need a referral to a good lender? Have a question? Feel free to contact me and I would be happy to help! Have a great day!