Buying a home for the first time proves to be a learning experience. Here are three takeaways from my experience:
- Debt-income ratio plays a big role
It may not matter if you’ve got plenty of cash stashed away for a down payment. A lender wants to see that your debt-income ratio is low, since studies show that borrowers with a higher debt-income ratio are more likely to have difficulty making loan repayments. This doesn’t just mean credit cards, student loans, or other bills that you typically think of as debt. This also means rent, car payment, and other regular expenses. How much of this debt you have, compared to your monthly income, will come into play when you apply for a loan.
- Longevity is taken into account
Lenders will likely want to see that your employment history is steady, or that you have a consistent income stream. Many applicants for home loans are asked to show around two years of income and tax returns. The idea is that you can prove your earnings to show that you are able to repay your loan monthly.
- Putting more down isn’t always better
While the amount you put down will vary depending on your loan, you will have to put down the minimum required, or you can put down more. You might assume that more money down equals a lower monthly payment each month, and yo
u would be right. But consider whether it makes enough of a difference in the monthly payment to put up more cash, leaving you with less in the bank. Each buyer should find a down payment amount that they are comfortable with, and that leaves them with a monthly payment that is feasible. Other factors that affect your total monthly payment will come into play, like taxes and if Private Mortgage Insurance is required. However, many buyers are surprised to find that putting more money down doesn’t have as great of an impact on the monthly payment as they thought it would, so some opt to put down the minimum required with their loan.
While there is much to learn for those new to home-buying, remember that staying informed and doing your research are the best ways to have success throughout this process.
