Tips for First Time Home Buyers

If you need help in deciding whether to rent or buy a home, you're in the wrong place. Otherwise, here's some tips to help you save money during your home buying process and help you get the best interest rate possible.

Focus on Improving Debt to Income Ratio – Not Only Your Credit Score

Although everyone harps on credit, in terms of owning a home and qualifying for a mortgage, the most important financial parameter is usually your Debt to Income ratio. Your DTI shows lenders how much free cash flow you have within a given month and is often times more important than your credit score. Everyone loves focusing on your credit score, but at the end of the day your credit score is just a number and doesn’t always display the full picture of your financial eligibility in purchasing a home.

Finish paying down any installment loan accounts, auto loans or student loans that are close to being paid off

In order to get the best interest rate possible, your ultimate goal should be to show a 0% utilization rate on all credit card accounts, especially before applying for a mortgage and doing the hard credit pull. If you plan on buying a home, before you do that hard credit check it’s imperative to make sure you’re reporting a $0 balance to Transunion, Equifax and Experian on all revolving lines of credit and credit cards. This way they know that they’re showing the maximum amount of available credit on the date of the report and an excellent utilization rate. Also, it’s important to note that once you do a hard credit check, you have 60 days to shop around with lenders and find the best possible interest rate. Utilize that timeframe and window to best of your ability in order to get the best interest rate possible. However, student loans can affect your ability to get a home so make sure to be mindful of this.

Keep DTI Low & Pay Off Small Balance Accounts

Make sure you get your DTI as low as possible. The easiest way to do this is by paying off smaller balance loans and obligations that may be negatively impacting your monthly expenses and debt to income ratio. The accounts that will most likely be the culprit in this scenario are credit card accounts, personal loans, student loans, auto loans, etc. If you have any of the above accounts and they are relatively close to being paid off, take some extra cash to pay these down completely. You will lower your DTI and as an added benefit you will also boost your credit score by doing so.

No More than 30% of Gross Monthly Income allocated to Mortgage

Rule of thumbs vary by state since housing prices and demand for real estate vary so significantly across the US. However, a good rule that can generally applied nationwide, is that your mortgage payment should not make up more than 30% of your gross monthly income. In New York for example, this is much closer to 40% and these rules really depend on location and the property you are purchasing. This rule of thumb is also highly reflective of how lenders approve potential home buyers, so basing your finances off how lenders approve mortgage borrowers is always the best bet here. However, remember that these are just recommended guidelines that also have a great deal of wiggle room.

Avoid PMI with 20% Down Payment & Low LTV

As far as considerations go: Potential homebuyers really need to assess their finances and make sure that their Debt to Income parameters are within a reasonable rate of margin. Otherwise they might still have considerations to make when deciding on renting or buying a home. You do not want to take on the responsibility of becoming a home owner if you see a decent probability that your income and financial security could change in the future. Moreover, you should always look to have at least a 20% down payment so that you are starting off at a great LTV and can avoid paying PMI.

What Will Prevent You from Becoming a Homeowner

There isn't anything that can actually physically prevent you from becoming a homeowner in terms of finances. You can buy a home after doing a debt relief program or bankruptcy. Besides, being denied for a mortgage there isn't anything that will stop you from owning a home except yourself! We are often times in our own way.

General Thoughts on Home Ownership

Finally, before spending all the time to buy and ultimately purchase the home, ask yourself where you see yourself in 5 years? 10 years? Do you like the neighborhood, city, environment, etc.? Do you think you may move locations due to your employment at any time in the future? Do you have established roots in the community and family close by?

Here's what you need to know about a home down payment. If you have a 20% down payment and are ready to start building a family in the neighborhood then this is definitely a move you should consider making.