Preparing to get Pre-qualified!
It is likely that your real estate purchase will amount to one of the largest single purchases you will ever make. So it is important that you remember that Real Estate even if your purchase is your your home, it is also your INVESTMENT! How exciting is that! So you are an Investor! This may be the first item in your portfolio.
Analyzing your Finances is the first step in making any purchase. Remember the saying, “Don’t try to keep up with the Jones’”. They look like they have it all. They may be up to their eyeballs in debt too. Financial peace is a better goal. If you want that too, then gain and keep control of your finances. Know how much you can comfortably afford. There are numerous computer programs, applications, spreadsheets, and even financial booklets that can help you keep track of your Income and Spending habits. Find what works best for you. You will need all your financial records that pertain to your current income and expenses to proceed.
Have you created a Budget?
If you have an accounting program already in use that includes all of your financial income and expenses, and it is up to date, then you are ahead of the game. If not, then you will need to gather your income, banking account, credit card accounts, and any other financial information. This will take time and some effort but it will be worth it. Create a list of all income and expenses for the previous (full) year. Take your time analyzing your expenses. Where is your money going? Calculate totals for the different categories. Then create an active budget listing all your household income and expenses based on the past 12 months. If you use an accounting program then make sure it is current and up to date and print out copies to review. Where is your money going?
We have provided a sample budget link below. Don’t worry, this link keeps you on this website. It is just another page. Budget Sample
Here are some Questions to Consider…
Income – How much do you have coming in? Tip: I do not recommend calculating Overtime into your income when determining how much of a house payment you can afford.
Expenses – Where does your money go? Tip: Use this time to decide where you may be spending frivolously. Don’t pick on your spouse.
Net – How much is left at the end of the month? Tip: Don’t pick on your spouse.
How much do you have in your savings?
Is there a loan you are about to pay off within 6 months or a year? Tip: Lenders typically do not include payment amounts with fewer than 6 months left in your debt ratio.
How much credit card debt do you have? Tip: Do not pick on your spouse.
What is your Debt-to-Income Ratio? This is calculated by your lender. It is Expenses divided by Gross Income (before taxes). Note: Expenses like groceries, clothes, utilities, gas, and your income taxes are generally not included in calculating your Expenses for this equation. The lower your ratio, the less “risky” you are to the Lenders. So where does your ratio need to be? Read below…
FHA Manual Guidelines require no more than a 43% ratio. The housing (expenses) ratio cannot exceed 31%. Those expenses include principle on the loan, interest, property taxes, insurance, and any association dues.
Once you feel comfortable and know what you can truly afford to move forward, then you can start interviewing lenders.
Please take the time to interview several Lenders and review my Things to consider when choosing a Lender.
Find our recommended Lenders below.