Home Loans: Set Your Budget Before You Go to the Bank
Even though the real estate industry is picking up steam and it can definitely be a seller’s market out there, this is still a good time for buyers. If you have a decent down payment, you can qualify for a home loan with an interest rate under 4%, which is near historical lows and will save you thousands over the life of your loan versus a 6% or 7% interest rate, the norm from just a few years ago. The best way to save money during the house-hunting and home loan process is arming yourself with tons of information, literally, as much as you can handle. I would start with watching Khan Academy’s videos on mortgages, so you can understand what you are getting yourself into. Once you understand and expect this new responsibility, you’re ready to think about your own numbers.
Set Your Limits
Before the bank tells you how much you can borrow, you should decide on a number you are comfortable. As a rule of thumb, your total housing costs (including the loan payment, taxes, HOA and insurance) should not be more than one-third of your take-home pay. That leaves you with the other two-thirds to pay for your living expenses, and set aside money for investing. Consider what the difference will be in your payment from what you pay in rent now. If you are paying $700 a month in rent now, and expect your total housing costs per month to be $1,000, are you able to afford the additional $300 per month? What would you do with the $300 if you weren’t spending it on a mortgage? If your answer is “blow it all on gummy worms and mascara”, you probably didn’t have a more productive use for your money. But perhaps you could put that money towards a small business that will grow and create a passive income for you. Consider all the possibilities before you commit to a new home loan as it will be a major financial consideration for the next several years.
Have Your Documents Ready
If you are considering applying for Newcastle Permanent Home Loans or other home loans, you’ll want to be prepared with your personal financial statements and documents. It shouldn’t be the first time that you are considering the answer to “What is monthly gross income?” when a loan officer asks you. Know where you stand with your income, assets and expenses. Have at least the following statements available:
- W-2’s or tax returns
- Bank statements
- Investment account statements
- Retirement account statements
Not only will it help you with your loan, it will make you comfortable on a regular basis. These days, I’ve been feeling a lot less stressed financially just knowing that my monthly income exceeds all of my monthly expenses by a healthy margin. I thought it would never happen two years ago, but it just took a lot of rearranging and prioritizing.
Look at Homes Close to Your Budget
A lot of homes are selling for more than listing price at the moment. But that doesn’t mean all homes are going above listing price. Consider homes within your price range, but don’t go too far outside of your comfort zone (you’ll end up like the girl on Say Yes to the Dress with a $4K budget falling in love with a $12K dress). If the home has some issues, could use a little TLC, or the sellers need to sell quickly, there could be room for negotiation in the price. It will take some time to find the seller who is willing to neogtiatie, but it could help you find an excellent value in the end.