So you're thinking about buying a home? And you're trying to decide if you can afford it? Well, pull up a chair, take out a pen and paper, and let's decide. Regardless of what type of home you choose, buying a house or condo usually requires getting a loan and making monthly payments.
First, Make a Budget
The first step to home buying is budget preparation. Make a list of your fixed expenses (those that don't change every month), such as car payment, rent, and child support or daycare. Don't forget to include incidentals such as cable TV, trash pickup, and cell-phone bills. Then list your variable expenses (those that change a little), such as entertainment, groceries, savings, and charitable contributions.
You'll also need a list of periodic expenses (insurance, medical deductibles, birthday presents, and repairs). If you pay insurance every month, list it under fixed expenses. The idea is to get the best financial picture of yourself as possible. Make a list of all your bills and add it up. If you need help, talk to the counselors at the Navy-Marine Corps Relief Society (NMCRS) — they can help make up a reasonable budget. Your list might look like this:
Fixed Expenses Variable & Periodic Expenses
Rent or mortgage 700
Gifts, savings 50
Electricity, gas, water 100
Car insurance 65
Telephone, cable TV 50
This budget must be tailored to your expenditures. Your water bill alone may be $100, or the $125 earmarked for groceries may barely cover your monthly pizza bill. If you have no idea what you shell out, keep a spending journal and record every cent you spend for one month. It's a time-consuming, tedious process, but it demonstrates very clearly where you're spending (or wasting) your hard-earned money.
Take a Good, Hard Look
The second step is to look at this list and compare what you bring home with what you spend. If the difference is positive, you're doing great. If the difference is negative, cut back and rethink what's important. Where can you cut back? One less cappuccino every day? On-board haircuts? A Sentra instead of a Corvette? You make the decisions depending on how much spending needs to be curbed. Visit the Federal Trade Commission's 66 Ways to Save Money for substantial savings ideas.
Play It Smart
Continued wise use of credit during your planning period is essential to maintaining your credit health. The lender will pull your credit, or FICO score, which is basically a snapshot of your willingness to pay back money you've borrowed. Your FICO score loses a couple of points every time you fill out a credit application.
The best idea is to get "prequalified" with a mortgage lender. A loan officer will take your loan application, pull a credit report with a FICO score, and submit your file to underwriting for preapproval of the maximum amount you'll qualify for. Prequalification lets you search in the right price range, it offers negotiation power with the seller, and it speeds up your loan approval process.
The lender will calculate your front-end and back-end ratios. Your front-end obligation, or housing ratio, is the total of your monthly housing payment divided by your gross monthly income. The back-end ratio, or debt-to-income ratio, is the total of all monthly obligations divided by your gross monthly income.
Department of Veterans Affairs (VA) loans only calculate a back-end ratio, but they also have other requirements, such as that a certain amount of money be left over per person per month. Federal Housing Authority (FHA) loans ask for a ratio of 29:41, which can be stretched a little, and conventional loans (read about these at Fannie Mae or Freddie Mac) ask for a 28:36 ratio. These ratios are guidelines, not etched in stone.
Things to Consider
Here are a couple of tips to keep in mind. If you take advance pay while making a permanent change of duty station, the repayment counts against you as a fixed debt. If you need to pay off debts to qualify, pay the debt with the highest monthly payment first. This flies in the face of conventional debt-reduction wisdom, but lenders count monthly obligation, not percentage rate.
The most important part of buying a house or condo is to decide what payment you're comfortable with. If your rent payment has never been over $650, a mortgage payment of $1,400 may cause payment shock even if you can afford it on paper. And along with bigger houses come bigger utilities, property taxes, insurance rates, and maintenance expenses.
Planning and budgeting are the two main ingredients to a successful home-buying experience. You'll want to buy as much home as you can, but also only as much as you are comfortable with.