For first time home buyers, purchasing a house can be a daunting experience. At times, it can feel like having a Ph.D. in finance is required just to figure out the costs and hidden fees that go into your mortgage.
Luckily, our expert McAllen realtors at Equity Assets Realty have plenty of experience helping first time home buyers — and even fifth time home buyers — get the best mortgage possible so they can acquire the home of their dreams.
Our realty agents have learned many meaningful tips and strategies to help our clients determine how much of a mortgage they can afford. Below are a few of the most useful tips they have uncovered to help you find an economical, and ultimately, comfortable mortgage for your budget.
1. Know the Golden Rule of Mortgage Affordability
Our experts know Rio Grande Valley realty and mortgage affordability. In the real estate industry, it pays to know the golden rule.
That golden rule? That’s the 28/36 rule.
The 28/36 rule recommends that you spend no more than 28 percent of your gross monthly income on total housing expenses and no more than 36 percent on all monthly debts.
Let’s dissect exactly what this means.
The first half of the rule is known as the “front-end ratio,” and it encompasses all expenses in your PITI, which is monthly payments, interest, property taxes, and insurance payments. Let’s not forget that this includes condo and/or housing association fees, but excludes monthly utility bills like light or cable.
For example, let’s say that you take home around $5,000 a month. If you take 28 percent and times it by 5,000 (5,000 X 0.28), you get around $1,400 as a result. That number is the most a borrower should spend in terms of a monthly mortgage, homeowners insurance payments, and/or property taxes.
On the other side, the 36 percent is known as the “back-end ratio,” and it is calculated by taking all debts you have into consideration, including:
- PITI payments for your mortgage
- Homeowner’s association dues
- Condo fees
- Credit card debts
- Student loans
- Other personal loans
- Utility bills
- Car note
- Monthly alimony payments or child support
So why not call it the 36 rule and just be done with it all? Because there is a complete distinction between the front-end and back-end ratios.
Monthly payments are only included in the back-end ratio when they are expected to be paid for the next 10 months or longer. Still paying off that car you bought for the next 9 months? That won’t be factored into the back-end ratio.
To illustrate this point, pulling from the example above, let’s say all of your PITI payments are equal to $1,400. Now, let’s stack on other monthly debts like car loans, student loans, and/or utility payments, and the new total is $1,850.
In order to qualify for the back-end ratio, a borrower would have to make at least $5,138.88 in gross monthly income (1,850 ➗ 0.36 = 5,138.88).
In the end, it is important that borrowers pay down all of their debts and other loans in order to qualify for larger mortgages.
2. Your Down Payment Matters
It may seem like common sense but it’s definitely worth repeating—the larger your down payment, the lower your monthly mortgage will be.
If you want to save even more money in the long run, you will want to pay down at least 20 percent of the home’s total value. Why? Because at that point, you generally will not have to purchase a private mortgage insurance, which protects the lender should you default on your home. Suffice to say, these insurance plans aren’t cheap—they can come at a cost of a couple hundred dollars a month.
That’s why your down payment is so important. While it may take some time to acquire the funds, it will be worth the longterm investment of owning a home, and as the old saying goes, “All good things take time.”
(But don’t take too much time. Taking too long to build up the capital for a large down payment may come at the cost of an increased price tag or higher interest rate.)
3. When in Doubt, Use Your Rent to Figure It Out
It’s a smart move to use your current rent as a gauge to figure out how much of a monthly mortgage you can afford. If you are struggling to make ends meet rent-wise, going for a home that has a higher monthly mortgage than what your rent currently is can be a disaster waiting to happen.
It’s also worth noting that houses come with many provisional expenses that renting helps you to avoid. For instance, are you experiencing some sort of plumbing issue? That’s coming out of your pocket. Did one of your appliances break down? You’ll have to carry the cost. Ant infestation…well…you get the idea.
If you have no wiggle room for these extra expenses, you will be financially stressed, and that is never a good thing.
Getting on the good side of a tax adviser could also be beneficial as a homeowner because you will want to itemize your deductions. A tax adviser (or even a tax software program) can help you find the best options for tax purposes.
Looking to purchase a home can be a scary ordeal, but with the right McAllen realtor by your side, it can be a memorable and exciting experience.
Our McAllen realtors are ready and eager to help get you into the home of your dreams. Contact us today at (956) 994-9455 to start that journey.