Buying Your First Home? Determine Your Housing to Income Ratio First

Buying your first home is one of the most exciting (and perhaps intimidating) times in your life. But before you start seriously shopping around, there’s some groundwork that needs to be done. Here’s a checklist to get you started in finding your perfect match and approach the real estate market strategically as an informed home buyer.

Set a Budget and Stick to It

If you’re serious about becoming a homeowner, you need to get ready now. Buying a home is a big decision and a major investment of time and resources; so do your math and determine your budget first. Calculate how much house you can afford before you even start looking around.

Understanding Qualifying Ratio

Just because you’ve been approved for a certain amount doesn’t necessarily mean that’s your price range. The general rule of thumb is that mortgage payments should not exceed 28% of your monthly take-home pay. This is called a housing expense ratio (also known as “front ratio”) and it is generally set at 28%. The housing expense measure is the maximum percentage of your gross monthly income that can be applied to housing (including mortgage principal, interest payments, property taxes, hazard insurance, mortgage insurance and homeowner’s association dues). Typically, conventional loans have a qualifying ratio of 28/36.

The second number (36%) is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.

28/36 Rule

For example, if an individual with a monthly income of $5,000 sticks to the “28/36 Rule,” they would be able to spend a maximum amount of $1,400 on monthly housing expenses. An additional $400 would be used for other debt including car loans and credit card expenses.

Rainy Day Fund

Your “rainy-day” fun is the money you hope you’ll never need to use. It’s for the unexpected and unanticipated expenses….not for personal wants or desires like a new car or vacation. While you can’t stave off every emergency, you can take off some of the financial sting by making sure you have enough when you really need it.

How much? A good rule of thumb is to have enough to cover three to six months’ worth of living expenses.

Stick To Your Plan

All of your expenses need to be calculated into your budget to see if the price is feasible. And then, here’s the key: don’t let your emotions and excitement of finding dream home (that may be outside of your budget) compromise your decision. Stick to your plan.

Buying Your First Home

Once you have determined your budget, make sure you are wise in choosing a good Realtor to guide you through the home buying process. Do your research and get all the answers to all your questions. Buying your first home is exciting, be patient until the right one comes along. You’ll know it when you see it!