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Thoughts about beginning stages of home buying
Hello all! I'm still new to the home buying environment and about a year to 18 months from buying. But I have the itch to know more. I want to know what I alone would be approved for. Would it be dumb to go through the steps just to find out a ball park range for just myself even if I don't intend to do anything for at least a year?
Background: I'm a 22year old working as a nurse in Iowa. I have no debt and only pay for living expenses (i.e. rent, internet, electric, groceries etc). I havn't checked my score in over a year but if my memory isn't foggy I believe it was in the 720 range last year. I'm sure it was at least 700 just not 100% sure if 720 was the number.
Any thoughts are appreciated. Part of this is a learning process and a lot of it is curiosity to know more!
Thanks!
Re: Thoughts about beginning stages of home buying
This is an exciting time! There is a bit to learn too.
Most MMers recommend reading Home Buying for Dummies. It's one of those yellow and black books - you can probably get it cheaper on Amazon or Ebay.
Always be aware that there is a significant difference between what you can be approved for and what you can afford.
Banks typically approve buyers for more than they buyers want or should spend on a home. It is up to the buyer to know her financial limits/budget and to stick to it so she don't end up broke and house poor (or worse).
The rule is that your housing payment including the principal, interest, home owner's insurance and property taxes plus utilities should be no more than 25-28% of your take home (after tax) pay if you are in a low or mid COL (costing of living) area and 30% if you're in a high COL area.
For example, as a nurse if you bring home $40k annually after taxes, your monthly housing payment should be no more than ($40k x .25 = $10k, $10k / 12 months = $833 paid per month) the same math applies to the 28% and 30% categories. Obviously, I made up the $40k, so you can adjust accordingly.
In addition, you need to save up for a down payment. Doing a down payment can help you get a lower interest rate, not have to pay PMI (read about it in Home Buying for Dummies), and have your loan application be more favorable in the eyes of lenders because they will see that you are personally invested in the property.
Beyond the DP, you should have an emergency fund of at least 3 months expenses saved up in case something happens. Most people strive for at least 6 months. Some do more.
When searching for a home, always plan on your future needs, possibility of resale, and LOCATION! You can always change a home, but never its location.
Regarding your application question...if you aren't a serious buyer right now, there isn't any reason to do an application, which will pull your credit. Before you do an application, research lenders, read HBforD, save, and learn as much as you can about your budget.
Your bank should be able to do a pre-approval for you for free (ours did) and that would give you an initial ballpark. However, like the earlier poster said, that doesn't account for the taxes/insurance on the home that's normally rolled into an escrow that gets billed with your mortgage payment. And even if you have a fixed rate mortgage, your escrow will vary with your homeowners payments and property taxes.
And I second the emergency fund. I had to have a roof replaced ($3900), the hot water heater ($1000) and heating/ac ($6400) systems replaced at the same time (they were linked together), and just now I had the fascia/sofit replaced costing me another $3100 (due to the leaking roof). And when stuff like this needs replacing, you can't always save up for it (like the hot water heater).
Not trying to scare you off, these are all manageable as long as you plan and save for them.
Oh also any preapproval will expire after about 90 days. So doing one 18 months early doens't make a lot of sense for that reason. Basically you'd just pull your credit for no reason.
If you have credit in the 700s and are on time with your payments and CCs, with a stable job and income history, there shouldn't be any trouble being approved once the timing is right.
I would highly suggest getting a pre-approval now. it's a good way to check your credit score, and find a range of what you can afford, so that you can narrow down the house searching process.
I agree with PPs that you should ultimately look at your monthly obligations and what you can afford (we were approved for X amount, but only wanted to spend Y due to added monthly obligations such as student loans, car payment, emergency funds, etc)
I would recommend looking into any first-time homebuyers programs in your area too. we were part of a grant program that gave us money towards closing costs, which was quite helpful. the bank would know more about these types of programs - so bring it up when you meet with them!
Hubby and I started looking for houses about 16-18 months before our wedding. we ended up buying mere weeks before the date! Spending that time looking gave us a good education about the real estate market, let us see a lot of options, and gave us the time to be picky and not have to rush into buying a less-than-stellar house. it might sound early -- but its never to early just to see what's out there! having that pre-approval before heading to open houses is very helpful so that you don't make your wish list unattainable.
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gymbugmj2k
Thanks for your thoughts. We would probably be in a similar situation looking for houses and getting married!
My S/O is in the military and we would likely apply for the VA loan if that seemed fit. We plan to have a lot to put down. We are currently kicking around buying something cheaper, living there for 5 years or spending a little more and setting up shop either forever or for much longer than 5 years!
Thanks everyone
My bank does a pre-approval without a credit check.
That's nice, but without a credit report pull, the figures they give you will be kind of a wide range (a very educated guess) since they cannot "quote" you a guarantee without covering their bases first. Just keep that in mind.
Edited to add: And the 90 day preapproval timeframe is pretty standard. They usually expire after that.