Owning a Home, the Easy Way Part II

Realizing the American Dream

Metro Service
Buying a house is a big step, so you should consider the option that best suits your possibilities.

■ Anthony G. Moya / Contributed

There are many aspects to consider when it comes to being prepared to undertake the financial responsibility of owning a home and, in particular, when buying a home for the first time. Therefore, this can act as a guide presenting what is most important when buying a home. Is it good credit, income, or job stability that is important? Well, they all are. Here are some specifics on what important items and their relationship to qualifying for a mortgage loan are.

Debt-driven society
Unless one inherits money or makes it big and can pay cash for a property for sale, most people will need to apply and qualify for a mortgage loan in their first purchase. It was covered in the previous article, Part I, that a homebuyer would require a down payment. In this section, Part II, I will elaborate.
When each person starts out in paying his or her own, they usually start without a nickel to their name. After finishing school, whether it be high school or college, most are without the proper funds to start on their own. Perhaps living at home and saving money before they venture on their own is a start because money is required for rent, food, and all other life sustaining responsibilities. Because of this, people rely on others including their families to provide the means to survive. In our American society, we often times need credit to make our life purchases. Thus, we start applying for credit and build a good line of it for future purchases. Debt is a normal factor in our economy that almost every working class citizen deals with at some point of their lives.
The question is: how do we handle the debt that determines a good portion of our livelihood? The credit bureaus track everyone’s personal debt and rates us all on how well or how poorly we manage it. The accumulated history that reflects a borrower’s performance is evaluated by bureaus such as Experian, Equifax, and TransUnion who then report our individual scores to places we would be interested in doing business (e.g. car dealerships, banks, apartments). The key is to learn how to handle debt; the goal is to eliminate it with careful planning.

What can a homebuyer afford?
When a person decides the time has come for them to buy a home, the new buyer usually consults with others who have had experience doing so. Depending on who they consult with, whether it be a friend, neighbor, or even a short article off of the internet, potential new homebuyers can still get confused, discouraged or misled about the process. In reality, there is a simple way to learn what goes into the home buying process and what affordability really means.
What is the purchase price? An average house can range anywhere from $300,000 to $500,000+ depending on the area. Most people base their decision-making off of how much they can afford monthly. This goes back to Part I that discussed designing a monthly budget that will take into consideration a person’s net income. The focus is the house payment, which will drive the decision to purchase a home that best suits their needs.

Monthly House Payment
If indeed it is the house payment, the question is how much will the monthly payment be for a home selling for say $400,000 and what is the breakdown of the cost? A mortgage loan is usually calculated based on a 30 year fixed period of payments which can be referred to as amortization. This means the life of the loan is 30 years consisting of 360 payments that would ultimately pay off the $400,000. There are other types of loans with different time periods, however, for illustration purposes the focus will be on a 30 year fixed loan to explain the way house payments are figured by lenders.

House payment break down
It’s important that new buyers understand that the house payment is made up of many parts besides principle and interest. In addition, the house payment includes property taxes paid twice a year and hazard insurance paid yearly. Depending on how much the new buyer put down as a down payment will depend on whether the house payment includes mortgage insurance. This kind of insurance is required by lenders to protect their interest as a requirement in providing a loan. The cost is normally added into the house payment referred to as mortgage insurance or PMI (private mortgage insurance).

PITI and PMI
The acronym for a house payment is known as PITI, which stands for principal, interest, taxes, and insurance. The PMI is the mortgage insurance paid by the borrower in the event he or she defaults in making the mortgage payment and provides the right for the lender to foreclose on the new borrower. In the next part of this informational series, valuable information will be provided on how the new buyer can protect themselves in a situation where their property is being foreclosed.
The formula used for calculating a monthly payment is the total cost including any outstanding debts divided by the new buyer’s gross income which will equal the debt to income ratio that determines the amount.
The outstanding debt consists of monthly debts such as a car note, student loan repayment, or credit cards. When both the house payment and outstanding debts are combined, their sum will be divided by gross income. After the division takes place the result will be a number known as a DTI (debt to income ratio). Some lenders allow a DTI to be as high as 50 percent. A family with a total debt of $3,150 (house payment + outstanding debt) with a combined income of $7000 per month will equal a 45 percent DTI, which means the new buyer would possibly qualify for a mortgage loan.

Gross income
Lenders typically require new applicants to submit two years of Federal Tax Returns (1040) along with two months’ worth of paystubs to determine their yearly and gross monthly income. Lender’s underwriters determine the gross income using several methods depending on whether the borrower is on salary or an hourly wage. Underwriters also look at tax returns to calculate the gross monthly income by calculating the average of the past two years.
Say the income was $52,000 for one year and the most recent year reflects an income of $60,000. The underwriter then calculates both figures and declares a gross income of $56,000 ($52,000 plus $60,000 is $112,000, then divided by two years is a sum of $56,000). Next the underwriter takes the $56,000 and divides by 12 which will yield a $4,667 per month gross income. In this scenario, if the borrower does not have any outstanding debt then their buying power will be $2,333.50 which represents a 50 percent DTI.
Even those these are just rough numbers, it is critical to be prepared before considering a home purchase. It is recommended that future homebuyers be preapproved for a mortgage loan before even looking for a property to purchase. The better prepared, the more successful the house hunting experience will be.
The American dream is for those ready to get their share. Stay focused, save your money, develop a short-term and long-term plan, and mostly be patient. Have all necessary in order and readily available during these important life steps such as pay stubs, tax returns, bank statements, valid driver’s license, etc. Above all else, make sure your bills are paid on time. Having a good credit history is essential in getting the keys to your future home.
Build your wealth with your first acquisition – a house you can call home.

Side note: If you have served in the armed forces and can get a DD214 Certificate of Eligibility then you will not need a down payment nor will you have a PMI.

Anthony G Moya is a California licensed real estate broker and mortgage loan originator who founded his company in 1989 helping first time buyers with their home purchase. He is also an author writing about the events that transpired during the real estate collapse. His book is entitled “Global Collapse:D-Day When 150 million people stop making their house payments.” A book that educates the public about the lending industry and how to work with it. Moya holds an MBA as well.

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