What to do BEFORE you start your search
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While launching into your suburban search can be exciting, there are a few things to ensure you’ve got in order first. Though lending guidelines have loosened, interest rates have remained fairly stable and home starts continue to grow, having your personal and financial “house” situated before you tackle the big tasks of finding the town and the home will make a big difference in the short- and long-term. Here’s where to start:
1. Check your credit and credit score
You’ve likely heard the countless reports that borrowing limits have lessened substantially in recent months — and that’s a good thing for many home buyers. That said, it’s important to understand where your credit history is right now, and if you need to take any steps to improve before submitting your mortgage application. Getting a pre-approval is great and, often, will help spot some of those areas for improvement. But even those letters are no guarantee of a final OK.
For starters, understand what your credit score translates to in terms of mortgage products. While it’s possible to get a loan with a score as low as 580, jumbo loans, HELOCs and other “piggyback” products as well as 90% loans have different lending standards than FHAs and conventional mortgages. Some particularly high value loans may mandate scores as high as 740 or, even, 760. And, remember, lenders use the “lowest middle” score of the higher wage earner. That means if you’ve got the higher credit score but your spouse earns more, you’ll be subject to the borrowing power of his/her numbers — and that could be a challenge depending on the financing you need.
2. Understand your debt to income ratio
Lending decisions are weighed heavily based on a prospective borrower’s debt to income ratio (DTI). A DTI takes into account any outstanding debts — debts that, specifically, would show up on your credit report — plus potential mortgage payments and taxes on your new home. To calculate your DTI, add up your existing credit card minimum payments plus student loan payments, car payments, deferred tax payments plus child support and alimony. Once you have a number, add in your projected monthly mortgage and property tax payments and divide by your gross monthly income.
Got the percentage? If your DTI is below 28% you’re likely in great shape to get the loan amount you’re looking for. Got something higher? Don’t worry — most lenders consider up to 36% to be a good DTI and, in higher priced markets, many will go as high as 41%-45%. With certain factors — significant savings or a very sizeable down payment — some lenders will even go as high as 50% or more. Check with your lender or mortgage broker to see how much flexibility you have. And if you’re teetering on the approval line, now is the time to get your finances in order. Often getting your DTI to an acceptable level is as simple as paying down or paying off a current debt or two.
3. Estimating closing costs — and ensuring you’re covered
Even before your lender gives you a good faith estimate, it’s good to consider what your closing costs will be and, more importantly, to ensure you’ll have cash on hand to pay those fees. Closing costs outside of major metro markets typically range from 1.5% – 4%, which could be a difference of tens of thousands of dollars. While it’s possible to roll some or all of these fees into your mortgage if your home appraises above the accepted offer or, even, to accept a higher interest rate in exchange for some lender assistance, the majority of the time closing costs need to be paid in cash by the buyer. And, often, a lender will want to see that you have the means to cover those costs before approving your final loan.
4. Freelancer considerations
If you or your spouse earns income as a freelancer, be sure you understand the specific implications when it comes to financing your home purchase. Typically lenders will use an average of the last two years of earnings to calculate that person’s gross income. That means if you generated significantly more this year versus last year, your borrowing power could be lower than you think. Be sure you’re using this average when calculating your DTI to ensure you have a clear picture of your potential loan amount — and, if you’re coming up short, you may want to explore holding off until your upcoming taxes are submitting, which could bring up a lower than desired average.
Understanding these key considerations will put your in a more powerful position when it comes to exploring towns and, ultimately, homes. Knowing where you stand today and what, if anything, could make you a better buyer will not only enhance your move to suburbia but will ensure you iron out any wrinkles before they become serious obstacles down the road. Chances are you’ll find you’re in great shape to move forward — but, if not, take a few days, weeks or even months to organize, then reassess. That window could make a huge difference when it comes to your search.
If a potential move for 2016 is on the horizon, click to start the suburban jungle questionnaire to get organized! Are you considering a big move in 2016? Get yourself and your family organized with Suburban Jungle’s online questionnaire.
This unique questionnaire was designed to streamline your conversations and get you started on the path to suburbia. Enjoy!
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