Gain a better plan rather than living paycheck-to-paycheck with your next mortgage
Homeownership is a goal that most of us have. In order to make this dream come true, future homebuyers need to do some financial planning and budget their money in order to save for a home. Let’s take a look at a possible financial scenario of a newly-married couple, Brad and Ann, renting an apartment and plan to purchase their first home within the next 12 months.
Build good credit
First things first. If your credit needs a little TLC, you need to take care of that first. Talk with one of our helpful Mortgage Bankers to review your credit report and profile. You will work with your Mortgage Banker to ensure there is no suspicious activity or late payments recorded that shouldn’t be there. If you have a poor credit rating, it could limit the amount of house you can qualify for due to a high-interest rate, or result in your application being denied by an Underwriter.
If your loan application gets denied, BankSouth Mortgage can help you get back on track with your credit and finances. We never want to say “no” to a borrower, but rather help each customer achieve their financial dream of homeownership.
Add up monthly income sources
Now for the second-largest elephant in the room when it comes to planning a budget, your income. There is no way you’re going to be able to know how much home you can afford if you don’t add up your monthly income sources.
In our make-believe financial scenario, Brad is an Accountant brings in $2,900 in take-home pay a month, and Ann’s monthly take-home amount is $3,200 a month as a Paralegal. That’s a total of $6,100.
Some applicants may have multiple sources of income, such as income from part-time jobs or bonus and commission income. This income can often be considered for qualifying purposes, as long as you can document a history of receiving it.
Add up monthly expenses
Brad and Ann have been renting a two-bedroom apartment in a large downtown area that is an easy commute for both of their professions and is close to dining and entertainment at night and on the weekends. These luxuries come at a cost. Let’s look at their monthly expenses.
Rent: $1,800
Retirement Savings: $610
Cushion Savings: $400
Food: $350
Charity: $600
Utilities: $300
Clothing: $100
Credit cards: $300
Brad car payment: $300
Ann car payment: $325
Medical/prescriptions: $100
Recreation: $300
Total: $5,185
Leftover: $615 – You will want to consider what you have left after all your expenses have been paid. This can be used to cover unexpected or irregular expenses.
Know your Debt to Income Ratios
Lenders consider Debt to Income ratios or DTI when determining whether an applicant qualifies for a mortgage. It’s a good idea to know your own DTI when preparing for buying a home.
Let’s calculate Brad and Ann’s DTI.
First, we take their proposed housing expense and divide it by their total income. For this scenario, let’s assume they are looking for their new mortgage to be no more than $1500:
$1500 / $6100 = 24.6%. This means 29.5% of their income is going towards their housing payment.
Then, we take all their expenses on credit, such as car payments, installment loans, and credit cards, plus the housing expense and divide that by their total income:
$1500 + $300 + $300 + $325 = $2425
$2425 / $6100 = 39.8% This means 39.8% of their income will be going towards housing and other debts.
DTI Ratios: 24.6/39.8
Most lenders like DTI ratios no higher than 31 for the first number, and 47 for the second number. BankSouth Mortgage does have some mortgage programs that allow for higher debt-to-income ratios. Consult with your Mortgage Banker for more information.
Budget for homeownership and life expenses
This looks like a healthy budget, but Brad and Ann still need to plan on costs that come with owning a home along with anything life may bring them in the future.
When you are budgeting for a new home, it’s important to plan for unexpected costs and expenses. Let’s see how Brad and Ann did this.
Re-prioritize where your money is going
Mortgage: $1,800 $1,500 – mortgage costs less than rent, and is below 25% of their income
Retirement Savings: $610
Cushion Savings: $400 $800
Food: $350
Charity: $600
Utilities: $300
Clothing: $100 $50
Credit Cards: $300
Brad car payment: $300
Ann car payment: $325 – paid off
Medical/prescriptions: $100
Recreation: $300 $200
Total: $5,185 $4,760
Leftover: $890
Key takeaways
As you can see, with a few adjustments Brad and Ann are able to map out how to reach their financial goals with a simple budget. Three key simple things to do to stay in good financial health are:
- Build strong credit health. Stay on top of your credit score and work with the credit bureaus to correct anything that is not accurate.
- Know your income and expenses and know what you can afford.
- Make a budget to maintain a good DTI. Demonstrate your ability to set and stick to a monthly budget.
