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Five Factors Affecting Your Home Purchasing Power

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Jean Dikken
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Buying a home is exciting. It's also one of the most important financial decisions that you will ever make. Before you start looking for a home and shopping for a mortgage, take the time to prepare financially. You'll be in a better position if you take the time to check your credit, assess your finances, set your home price budget, and decide for yourself whether it is the right time for you to buy.

Debt-to-income Ratio
For most mortgages, your debt-to-income ratio needs to be at or below 43%. To calculate your debt-to-income ratio add your proposed new payment, principal, interest, taxes, and insurance, add your current monthly debt, divide those into your income, and that's how to come with a debt-to-income ratio. Debt is another word for loans, or money that you have borrowed from a financial institution or privately.

Credit Score
Steady and sufficient income can come from many sources, but you need to provide documentation to prove it, which can be shown in your credit history. How you have handled credit in the past is a good indication of how you will handle a monthly mortgage payment in the future. Your payment history makes up 35% of your total credit score. The number one thing that you can do to keep a great credit score is pay your bills on time. The number of accounts paid on as agreed, negative public records or collections, delinquent accounts, number of past-dues, and how long since the payment has been past due will impact that payment history.

Savings
Ideally you should have money saved for a down payment as well as funds for emergencies. Savings can be in the form of cash, a traditional savings account, gifts from a family member and retirement funds. The primary source of a down payment is personal savings, so it's important to point out that the funds must be in your account for a minimum of 2 to 3 months and cannot be a large deposit made recently.

Down Payment
So how do you decide on how much to put down on a mortgage? The minimum down payment for a conventional loan at Compeer Financial is 5% down. This is typical for most lenders providing conventional loans. Start saving towards that 5%. Set a goal. Set up an automatic savings plan. Have a direct deposit money from each paycheck going into a separate account each month. If you have to, pretend you don't know about it until you reach your goal.

It’s worth noting here that if you borrow more than 80% of your purchase, you will more than likely pay an additional amount for Private Mortgage Insurance (PMI). PMI is required on all loans with less than 20% down. Private Mortgage Insurance protects the lender against any financial losses if the borrower fails to repay the loan.

Selecting a Mortgage: Conventional vs. FHA or RD
It’s natural for first time home buyers to ask about first time home buyer loans. First time home buyer loans are typically offered from the Federal Housing Administration (FHA) or USDA Rural Development (RD).These loans require a small down payment or none at all.  However, make sure you carefully compare the long-term costs of your home mortgage comparing conventional loans that may require a down-payment versus a first-time homebuyer loan where a down-payment may not be required. Oftentimes the cost analysis will show that a ‘first time home buyer loan’ may not actually be your best option.  

With the FHA and the RD loans, the borrower is required to pay a guaranteed fee and there is PMI required on the FHA and RD loans for the entire length of the loan - potentially 30 years. However, with the conventional loan, Private Mortgage Insurance typically stops after 7-1/2 years, as long as the borrower is making the scheduled bill payment.

There are a lot of decisions and factors that go into buying a home and impacting your purchasing power. Understanding the different types of loans, how to set yourself up financially and determining your personal priorities, will pave the way for a successful home buying experience.


This article was written by Jean Dikken, NMLS # 712127.
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