I’ve been having more conversations than ever with people who share the following sentiment about home ownership. ⬇️
They “Blame the system”.
They’re "Being taken advantage of."
"Housing should be free to all." 🙄 🗣️
Welp……grab some Motrin, Nancy, because this is going to hurt.
Housing (just like anything else) belongs to those who earn it.
And typically, people think buying a home is as simple as googling, “Buy Cheap Home Near Me,” then pulling out their credit card. 💳
There’s actually some ducks you need to get in a row before buying a home. 🦆
Here’s A Short List:
1. Your Credit Needs To Be At Least 640, But Over 720 Is Better
Put yourself in the bank’s shoes. If somebody asked you for money, how would you decide who to lend to?
Based on their history of paying back debts.
That’s what your credit score is….kind of.
The lender will want to see you have consistently made payments towards things like credit cards, car loans, DTE bills, and student loans.
To clarify, if you don’t have all of those, I’m not advising to run out and get them all, those are just examples of track records they’re looking for.
“But, what if I pay cash for everything?”
That’s respectable, (and by definition you are wealthier than the majority of the population with no debt) . . ..
But you likely have NO credit, which is something a bank won’t lend money towards.
2. Your DTI (Debt-To-Income) Ratio
Have you ever played a terrible game of monopoly where you only held Baltic & Mediterranean, and the rest of the time you slowly bled out paying bills every trip around the board?
Thats an extreme case of high “debt to income”ratio.
Ever since the 2008 crash, the banks are now legally required to make an effort to only lend to people who are in a position to comfortably afford their monthly payment.
Whats the magic DTI ratio?
It’s not an exact number but they typically want your RECURRING monthly debts to be 40% of your income.
“But Fox, I’m not able to save 60% of my take home pay each month!”
That’s not what I said . . . Your monthly debts are the recurring monthly payments that you’re obligated to pay legally.
Banks don’t consider things like grocery bills, or Netflix subscriptions, or restaurants, towards your debt . . . Because you aren’t legally obligated to pay those each month.
Tho, you might be physically obligated to buy food. 😏
Now . . . that’s just to get pre-approved for a loan.
I advise all of my clients to avoid being house poor. (Meaning, only having enough money to pay your mortgage)
And to do this, a good rule of thumb is to keep your mortgage payment (which consists of loan principle, interest, property taxes, and insurance) between 25-30% of your take home pay.
I’ve personally had a mortgage before that was around 45% of my take home pay.
It was like being in a 5-star prison.
0/10 don’t recommend. 🤮
3. The Down Payment
Banks want to ensure all lenders have some “Skin In The Game” making it less attractive to walk away from a house.
For a conventional mortgage, you’ll need 20% down.
No exceptions.
These mortgages are super attractive to sellers because their likelihood to close is high, and speed of closing is fast.
But with an FHA (federal loan), you can buy a house with as little as 3.5% down.
Here's cheat sheet of what you would need:
200k home - $7,000 Down Payment
250k home - $8,750 Down Payment
300k home - $10,500 Down Payment
400k home - $14,000 Down Payment
500k home - $17,500 Down Payment
(Don't worry, there are regularly government grants giving away 10-25k to first time homebuyers. Reach out to me to learn more about them.)
4. Closing costs.
The down payment does not cover closing costs, which will hover around 2% of the purchase price.
Sometimes these can be negotiated for the seller to cover, but usually not.
So make sure you have the funds for these as well.
I know MANY home buyers who had a real estate agent not explain this to them, leaving them scrambling for thousands to close. 😬
BUDGETING: The Lost Art
So that’s the short list of what you’ll need to prep to buy a home.
But unless you wanna be looking at a foreclosure in 3-4 years, you will need to learn how to budget.
Telling your money where to go, versus wondering where it went.
I’ll be talking about this next blog and how I fought my way out of $80,000+ in debt.
But in the meantime a good starting point if you are trying to get out of debt would be to check out Financial Peace University.
Cheers,
David Fox
The Black Belt REALTOR