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First-Time Homebuyer Guide: Questions to Answer Before Buying a Home

Taking the first step toward buying your home is both exhilarating and overwhelming. As you delve into the process, it is important to consider several factors. Buying a home is one of the largest financial investments you make in your life, so you’ll want to be well-prepared for the adventure ahead. Here are some questions to answer before beginning the process.

How is your credit score?
One of the most important factors in getting that favorable rate is your credit score. Your credit score is essentially a standardized way for lenders to determine how risky it is to lend you money. In order to get the most favorable rate on your mortgage, you will want to have the best credit score possible. Your credit score is formally known as a Fair Isaac Corporation Score (FICO® score). Many factors are taken into consideration such as your payment history, the amount of money owed and also the length of your credit history.

Can you qualify for a mortgage?
Another factor to consider is your debt-to-income ratio. If a loan program uses a 28/36 qualifying ratio, it means you are allowed to spend no more than 28% of your gross income on monthly mortgage payments and no more than 36% on total debt.This includes debts such as car and school loans, credit cards, child support and alimony. So if you earn $60,000 per year, your monthly gross income is $5,000. Under the 28/36 guidelines, your maximum monthly mortgage payment should not exceed $1,400, while your totally monthly debt should not exceed $1,800.

How much home can you afford?
If you have a larger down payment, you may be able to buy more home and still fit in the debt-to-income ratio. If not, you may need to look at a home that has a lower purchase price. Down payments are generally paid in cash, due at closing and based on a percentage of the selling price of the home. You can make a down payment of 20% or more and avoid the cost of mortgage insurance.

There are many affordable mortgage programs available, including loans that offer 100% financing, including VA and USDA loan programs. Additionally, there are low down payment home loan options that only require a down payment of 3.5% to 5%. Many communities offer programs to assist first-time homebuyers with paying their down payment or closing costs.

All loans subject to credit approval. Rates and fees subject to change. Mortgage financing provided by PrimeLending, a PlainsCapital Company (NMLS: 13649). Equal Housing Lender. © 2013 PrimeLending, a PlainsCapital Company. For full licensing and disclosure information, visit http://www2.primelending.com/Disclaimer.

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What House Can You Really Afford?

What does “value” mean to you? To me, the word “value” means priceless—things money cannot buy.

The problem with the American mentality is that we put such importance on material things and not on things that are valuable.

I cringe when I read inspirational or financial books that encourage people to strive to buy their “dream home.” What kind of message does that send? That people can only be as happy as the size of the home they live in? That they are better parents for providing a bigger home for their children?

The economic and real estate collapse we’ve recently endured should deliver a big message for those people striving to buy their “dream home.” I’m going to tell you: Do not buy your dream home. Learn what you can afford on paper, and then buy a home for half that price.

I know…you’re thinking, “WHAT?”

A client account I recently read about out of Austin, Texas, is a perfect example. After a couple finished school together in 2007, they decided to buy their first home. They went online to a dozen different mortgage calculators, and sat down with a mortgage broker. The mortgage calculators asked about their income and any debt they had.

They had no debt except car payments, so the average mortgage calculator said they could afford a $450,000 home. They looked online and found some very beautiful homes in that price range around the Austin area. They were excited to see they’d be able to buy a three-thousand square-foot home, with a bonus room, office, four or five bedrooms, island kitchen with granite counter tops and possibly a swimming pool.

They said it was like a giant carrot was dangling in front of them. The couple spent their weekends driving by these homes, and imagined living in one of them very soon. But one thing puzzled them. Each time they “crunched some numbers” and saw what their new budget would be, they never had enough money (or they were stretching their budget too thin). They asked each other, “Why do these mortgage calculators tell us we can afford a $450,000 home when our own calculator tells us otherwise?”

Mortgage calculators don’t ask you about the valuable and priceless things you want and need to do for your family. If you buy a home at the maximum you qualify for (which most Americans do), then you’ll have very little left for the most valuable things in life, or you’ll pay for the valuable things anyway and end up in credit card debt.

Here’s an example list of valuable expenses that may be of importance that the mortgage calculator never asked about:

Pre-school for 2 children: $10,000 per year
College fund for both kids: $233 per month

Retirement planning, IRA, investments: $650 per month
Life insurance (for both spouces): $120 per month
Health insurance: $820 per month
Disability and catastrophic insurance: $225 per month
Sponsoring three children in Africa: $105 per month
Tithing and charitable contributions: $550 per month
Gym membership: $49 per month
Soccer classes for 2 kids: $110 per month
Ballet class: $54 per month
Gymnastics class: $48 per month
Swimming lessons: $300 per year

Tickets to professional sports games: $500 per year
Tickets to concerts and theater performances: $500 per year
Sea World/Entertainment: $1,000 per year
Organic groceries: $4,000 per year
Doctor visits, co-payments: $600 per year
Landscaping, home upgrades: $3,000 per year
Birthday, baby shower gifts, etc.: $600 per year

If this was the Texas couple’s list, how in the world would they have been able to afford a $450,000 home and still pay for pre-school for both children, soccer/ballet classes, summer camp, Sea World, health insurance, doctor visits, organic groceries and donations to charity? Right, they couldn’t have afforded it without using credit cards.

So, they chose to buy a modest home for $215,000—half of what they’d qualified to buy! Their house doesn’t have granite countertops, and they don’t have a swimming pool. They converted one of the bedrooms into an office and their landscaping is sparse. But by buying a house for half of what they  qualified for on paper, they have the ability and freedom to invest in their future, donate to charity, start a business, send their children to the best schools in town, eat quality food and travel the world—all without incurring a nickel of debt.

Sure, it was a bit deflating to their ego to go shopping for a 5,000 square-foot home with all the bells and whistles and end up buying a home half that size. But now that they’ve lived in their home for almost four years, they realize it was the best decision they ever made. If they had bought a $450,000 home, would they be happier than we are now? Of course not. Would their friends respect us and cherish their  friendship more? I hope not (if so, then they weren’t really friends anyway). Would their parents be more proud of them? I don’t think so.

So why do it? Why feel pressured to go too far and buy the most house possible—and then live under constant stress to pay for it all.

“Money does not buy happiness; Scripture asserts this, research confirms it. Once you reach the median level of income, roughly $50,000 per year, wealth and contentment go their separate ways, and studies find that a millionaire is no more likely to be happy than someone earning one-twentieth as much.” — Nancy Gibbs, Time magazine, April 27, 2009

What’s valuable to you and your family? What is priceless? Budget for these things first, and then see what you have to spend on a home. In five, ten or twenty years when you look back on your life, what do you want to see? That you barely made your payments on your home each month, or that you were able to do everything you ever wanted to do with your family stress and debt-free? Picture your family in a smaller, more manageable home. Would your marriage be any different? Would your friends abandon you? Of course not.

What kind of home can you afford—really afford?

Let’s Find Your Perfect Home!

Purchasing a new home is a journey that requires attention to every detail. Don’t worry if you feel like you’ve changed your mind a million times on what you think you want. To help you best determine your wants and needs, start by making a list:

• List Must-Haves Features:
  • Located in a specific neighborhood
  • Single level, with few or no steps
  • List every feature you feel is a must
• List Features You Would Like:
  • Large Yard, deck, or a pool
  • Whirlpool tubs, walk-in closets
  • Certain type of architecture

My job is to help you determine what is available and attainable, based on your needs and wants. I will adjust focus as many times as it takes to find that perfect home for you. Please feel free to contact me anytime!

Trivia about Valentine’s Day

 

Valentine’s Day Trivia about Valentine’s Day About three percent of pet owners give Valentine’s Day gifts to their pets. One-third of all Valentine’s Day cards are accompanied by gifts. Hallmark has more than 1,330 different cards specifically for Valentine’s Day. About one quarter of Valentine’s Day cards have humorous messages. American women say they’d rather receive chocolate than flowers on Valentine’s Day. Teachers will receive the most Valentine’s Day cards, followed by children, mothers, wives, and sweethearts. About one billion Valentine’s Day cards are exchanged each year. The holiday is second only to Christmas in terms of the number of cards sent. The celebration of Valentine’s Day can be traced to the ancient Roman holiday of the Lupercal, which honored Lupercus the Lycaean, who protected flocks of sheep from wolves. Seventy percent of those celebrating Valentine’s Day show their affection by giving a card. Others make a telephone call (49 percent), give a gift (48 percent), plan a special dinner (37 percent), give candy (33 percent), have a meal in a restaurant (30 percent), or give flowers (19 percent). Pope Gelasius declared February 14 to be Saint Valentine’s Day in 498 A.D. Richard Cadbury invented the first Valentine’s Day candy box in the late 1800s. The Italian city of Verona, where Shakespeare’s lovers Romeo and Juliet lived, receives about 1,000 letters addressed to Juliet every Valentine’s Day. The Chocolate Manufacturers Association of America says 36 million boxes of chocolate are sold for Valentine’s Day. About 110 million roses, most of them red, will be sold for Valentine’s Day this year. Alexander Graham Bell applied for his patent on the telephone, an “improvement in telegraphy,” on Valentine’s Day, 1876. Valentine’s Day was originally associated with the mating season of birds. Fifteen percent of women in the United States send themselves flowers on Valentine’s Day. During Abraham Lincoln’s campaign for President, a Democrat named Valentine Tapley swore he would never shave again if Abe were elected. Tapley kept his word and his chin whiskers went unshaved from November 1860 until he died in 1910, attaining a length of 12 feet six inches. Americans spend $655 million each Valentine’s Day on candy, making it the fourth biggest holiday of the year for confectionery purchases, after Halloween, Christmas and Easter (in that order). In the U.S., it’s estimated that 64 percent of men do not make plans in advance for Valentine’s Day. During Victorian times, it was considered bad luck to sign a Valentine’s Day card.

Home Affordability

Homes are more affordable today than at any time in recorded history. It’s not only because home prices are down, though — it’s because mortgage rates are. Low mortgage rates extend a buyer’s housing budget farther than falling home prices ever could. But with mortgage rates changing every 4 hours on average, affordability can be short-lived.  Every time mortgage rates change, so does your budgeted maximum purchase price. And the changes can be dramatic.  Example: For each 0.125% increase to mortgage rates, your maximum purchase price must fall by 1.45% to stay “in budget”.

Tip: Mortgage rates are the biggest factor in home affordability. The lower you can get your mortgage rate, the more homes that you will find that meet your monthly budget. Rising mortgage rates can quickly erase your savings.

Picking the Proper Mortgage Product to Fit Your Needs

Mortgage rates are a major influence on your monthly housing budget, but, they’re outside of your control. Mortgage rates based on the price of mortgage-backed securities; bonds bought and sold on Wall Street. You can, however, control with which mortgage product you finance your home. And, by making better mortgage choices, you can avoid “over-paying” on your home loan.