As a buyer, you may be familiar with some of the costs and terms associated with the purchase of a home. When shopping for a mortgage loan, however, there are terms and fees that are lesser known and are important to be aware of. Here are some of the key topics to consider before purchasing a home and locking in a mortgage:
Debt-to-Income Ratio – A lender will use a client’s debt-to-income ratio to determine if they are financially sound enough to make monthly payments on the new loan. The debt-to-income ratio is a good indicator of how much you can afford, and lenders usually view a desirable one at 50% or less. This means that all of your housing-related expenses each month do not exceed 50% of your monthly income.
Duration of Stay – One thing that is commonly overlooked is the amount of time you plan to spend in the home. Depending on the market and cost of the property, it can take 5-10 years to gain enough appreciation and break even on a home (don’t forget you’ll have real estate agent commissions to pay on the sale). It’s a good idea to consider how long you will be in the home before you sell, or rent it to someone else, to help weigh the pros and cons of what and where you decide to buy.
Job Consistency – When applying for a mortgage, lenders will look at your employment history to determine how consistent your income is. If you are a W-2 employee or self-employed, and how long you have been in the job or industry are crucial aspects to determine how likely you are to make consistent payments on your loan. Generally, the longer you are employed and the more consistent your income is, the better you look at underwriting and the more likely you are to qualify.
Down Payment – Probably the most popular term when shopping for homes is the down payment. The higher the down payment, the smaller the monthly payments will be, and the more bidding power you will have in a competitive market. Generally speaking, a down payment of 20% is great, but some loan programs such as FHA only require 3.5% down. There is even a conventional first time buyer program that only requires 3% down.
Mortgage (Interest) Rates – For reference, an interest rate is the amount of interest due over the term of a loan as a percentage of the principal, or the amount borrowed. Of course, the lower the rate, the lower the monthly payment on the loan is. There are many factors that go into current market rates, but there are some things you can do as a borrower to help get the best possible rate. To read more about an entire list of the factors that affect your interest rate, click here.
Supplemental Taxes – after you purchase a home, you end up getting a supplemental tax bill (or catch-up bill, if you will). The county issues a tax bill for homeowners once a year, but when you buy a home, the tax bill gets reassessed. So, when the county issues tax bills for the following year, they look back at purchases and then issue catch-up bills. This is an important tax that you should remember to budget for.
If you are looking to purchase or refinance a home soon, please reach out to us as soon as possible! Rates are projected to spike more than once in the year ahead, so call us at (760) 930-0569 and one of our loan officers will discuss your options with you.