Currently in 2022 everywhere I look I see that there are not enough homes on the market! The headlines ready “Inventory is as tight as it has every been.” Property values have been climbing for the past 12-18 months and continue to rise. Mortgage rates as still not far off historical lows. Inflation is ticking up and eating away at my purchasing power.
Planning on buying a home in one year – what should I do?
There is no real way to know what the real estate and mortgage market will look like in a year from now. The only guarantee is that markets are fluid and will constantly change. The course that markets seem to be on now may be completely different in twelve months.
There are internal and domestic factors that impact real estate and mortgage markets. We also live in a big, interconntected world (that sometimes feels very small). International influences can crop up at any time and could have a huge impact on inflation, mortgage rates, and home values in the United States.
Although there are many things out of our control – when it comes to a first time home purchase – the focus should be on the things that we can control.
Where should I start?
When it comes to purchasing your first home, it is never to early to get started on your journey. The more prepared the easier it will be for an accepted offer and approval.
The 3 most important factors for mortgage approval
For mortgage approval the Big Three Factors are
Assests
Mortgage underwriters will need to verify ‘Funds-to-Close’. Your funds to close your downpayment, and related closing costs. The funds-to-close also includes and property taxes and home owners insurance premiums due at closing. Depending on your state, there may be additional taxes or fees also required at closing.
Income
The second bid factor lenders consider is your ‘Debt-to-Income’ ratio (debt ratio). Debt ratio is calculated based on gross monthly income (before taxes, 401k etc. is taken out). Guidelines for debt ratio vary somewhat depending on loan type (conventional, fha, jumbo). A great, conservative guideline to keep in mind is 45%.
What debts are factored into my Debt Ratio?
The great news is that not every monthly payment is factored into your debt ratio. A cell phone, utility or cable bill is not factored in. Your Netflix, Amazon Prime or Apple TV payment is not included in your ratio. Your debt ratio consists of borrower money. Minimum monthly credit card payments, car lease or loan payments, personal loans & student loans are the most common debts figured in to ratio.
In addition to your current monthly debt payments – the new housing payment is built into your ratio. The housing payment includes the principal and interest payment on the mortgage, the monthly property tax and any insurances required (i.e. homeowners, flood) and any association dues.
Debt Ratio Calculation Example
The home that you are interested in will carry a total monthly payment of $2,500 (included taxes, insurance etc.). Your three credit cards have a total combined minimum monthly payment of $225. Your car lease payment is $445.
Your gross annual income is $85,000 ($7,083 monthly). In this scenario, your ratio is calculated as:
$2,500 + $225 + $445 = $3,170 / $7,083 = 44%
You are good to go on the debt ratio end!
Your debt ratio is higher – not to worry – there are options available!