small wooden house with a heart in it, sitting on a table

Love and Mortgage

With Valentine’s Day upon us, love is looming in the air… While Cupid’s arrow finds its mark in the hearts of couples young and old alike, it appears as though there’s another side effect that we can predict as well: buying a home.

According to the National Association of REALTORS most recent Profile of Home Buyers & Sellers,married couples once again dominated the first-time homebuyer statistics in 2016 at 58% of all buyers. It is no surprise that having two incomes to save for down payments and contribute to monthly housing costs makes buying a home more attainable. via Real Estate with Diane Castro-Perez

While married couples make up nearly 60% of all first time homebuyers, single women and men also play into the mix…

a chart of first time homebuyers' demographic info

This is from our brief blog post at Simplifying the Market. That article ends by saying, “You may not be that much different than those who have already purchased their first homes. Let’s get together to determine if your dream home is already within your grasp!”

So let’s talk about that…

How to Decide If You’re Ready to Purchase a Home

Buying a home can be intimidating, even for the veteran homeowner. Not only must you list your current property (if you’re planning to sell it), but you’ll need to sift through dozens, perhaps even hundreds, of homes for sale. And this is merely the beginning of a long process towards finally purchasing a new house for you and your family.

But prior to reaching that stage, it’s important to decide whether you’re even ready to do so. Much depends on your current financial situation; you’ll need to determine how much you can afford to pay. In this article, we’ll help you navigate this process. We’ll show you how to calculate a manageable mortgage payment while factoring in additional, necessary expenses. You’ll also learn how to choose a down payment that makes sense for your current circumstances.

Determine Your Mortgage Payment Ceiling

Mortgage lenders use front-end and back-end debt-to-income (DTI) ratios to determine how much you can afford to pay each month. The front-end DTI represents the portion of your income that can go toward a mortgage payment. The back-end DTI represents the portion of your income that can be allocated toward the front-end DTI plus all other recurring debts. These debts include child support and alimony payments, auto loans, credit cards, and other financial obligations.

Commercial lenders often use a 28%/36% combined DTI. This means your house payment (i.e. the front-end DTI) can represent 28% of your gross income. Your house payment plus all other debts cannot exceed 36% of your gross income. The Federal Housing Administration (FHA) uses a 31%/43% combined DTI.

The front-end and back-end debt-to-income (DTI) ratios provide a reliable way to calculate a mortgage payment you can afford.

Factor in Additional Expenses

Consider the nonessential bills you pay each month. This lies outside the scope of groceries, utilities, car insurance, and other necessary expenses. For example, are you a member of a gym? Do you attend concerts on a regular basis? Do you enjoy eating at expensive restaurants with your friends? How about hobbies for which you allow yourself a monthly stipend?

These and other nonessential outflows should be deducted from the mortgage payment you calculated using your combined debt-to-income ratios (ref. previous section).

Identify An Appropriate Down Payment

Ideally, you’ll want to put a 20 percent down payment on your new home since doing so allows you to avoid paying PMI (private mortgage insurance). PMI payments can add an additional $100 or more to your mortgage. It initially seems a small amount, but it can become significant after paying it month after month.

If you lack the financial resources to put 20 percent down, you can use a small down payment. The downside to doing so is that your mortgage payment will be larger, and your interest rate on the loan may be higher. You’ll need to weigh the benefits and drawbacks of reducing your down payment. Another option, of course, is to purchase a smaller home, or Wait until you have a larger reserve.

Is There An Ideal Home-Buying Season?

Technically, no. Every local housing market is a little different, and each poses times during the year when it may be slightly more advantageous to buy. For example, homes for sale near elementary schools may be priced lower during the winter. Homes in areas that receive a lot of tourists during the summer may be priced lower during the fall. See our blog for other articles related to these real estate factors.

It’s worth noting that timing a real estate market is always dangerous. While waiting for home prices to decline, other factors may cause them to rise. Or, if demand is outpacing supply in the local market, as it currently is, a property that appeals to you may be purchased by another buyer.

Additionally, in the Jacksonville/Camp Lejeune North Carolina housing market, there’s simply no way to know when someone will PCS into the area who could be your perfect buyer. Likewise, orders can be unexpected for a military family who may be trying to sell you your dream home.

First, decide whether you’re truly ready to purchase a home by calculating the highest monthly payment and down payment you can manage. Then, set your sights on the neighborhoods that appeal to you and your family.

Please feel free to contact us with any questions.


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