7 Questions to know if you're ready to buy a home

#1 - Do you have stable income? 

Do you see yourself having stable income in the foreseeable future? And it’s hard to know really what the future holds, we don't have a crystal ball exactly, but you should at least feel comfortable that, “Yes, my future income is going to remain predictable.”

And just as important as the future tense is the past tense: "have you had stable income in the past?" More precisely, have you had stable income for the past two years? Because that’s what lenders look at… they look into your past to determine your future.

Speaking about stable income, if you're self employed or own your own business, a lender will much more critical when it comes to your income due to the fact so many small businesses fail every year. This leads me to the next point:

If you are thinking about starting a new career, or switching careers, or starting your own business. I know coming out of the pandemic, many people are thinking about leaving their employer. So think about how that is going to impact your ability to get a mortgage. Because if you don’t have stable income going forward, you’re going to lose your house, your credit history, and your ability to buy in the near future. So don't do anything stupid. If you’ve already started something in the recent past, like you’ve already started your business, you might have to wait a little bit to get your income level high enough to where you’ll qualify for a loan. So that’s just a little caveat I’d like to bring up before we move on to our second question.

#2 - Do you have any cash saved for a downpayment? 

Do you have any money saved up for your down payment? Yes? No? Maybe? Alright, I’ll level with you here, this is a little bit of a trick question. It’s more to test your character, because in all likelihood, you don't know how much you have to have to be saving towards a down payment in the first place. Like, how much house can you afford really? So it’s more to test your wherewithal to see if you’ve been saving towards something that is not quite tangible, but it’s something you really desire nevertheless. If you've already set aside a single dollar specifically for your house then you're well on your way.

So, have you done that yet?

#3 - Are you comfortable managing debt? 

Yes? No? Maybe? Well if you answered Yes, chances are you have been paying off your monthly debt obligations on-time and have using your available credit wisely. Congratulations! You probably already have a high credit score.

If you answered No or Maybe, it might mean you have some outstanding credit card bills due or you might be maxing out your monthly credit cards. If that’s the case you might have a lower credit score and you might not be ready to take on a mortgage (this is the biggest debt you’ll ever take). You have to pay off that debt monthly, otherwise they'll come take your house away (and that’s no fun.) So you have to shape up a bit financially and get to at least a 700 credit score. This translates to better interest rates will be available to you (meaning you pay less to borrow money). A 740 credit score is when the best interest rates are available to you, anything above this score is overkill.

Now, if you’re in the position of trying to build your credit or your spouse is trying to build credit, or you don't even have any credit history; consider an Apple credit card, not only do you have an Apple product, it’s a great beginner credit card as it has relatively low requirements to apply for and it’s a good training card as long as you use it responsibly. So start with that, start building your credit, and then you can apply for a mortgage when you’re comfortable answering yes to this question.

#4 - Do you have an emergency fund?

Do you have an emergency fund? Yes you! Yes or no? Often mistaken as the, “this vacation is an emergency! Thank you very much!” fund... ah, no... this is a 3 to 6 months of living expenses set aside "in case something goes wrong" fund. This will sustain you in the event you were to get laid off or you need to cover a medical emergency.

This fund becomes even more crucial when you become a homeowner. For instance, homeowners on average have spend $3,200 a year on maintenance costs and an additional $1,600 on emergency repairs.

There’s nothing worse than absolutely putting all your money into a house and you’re at $0 and then all of a sudden something goes wrong. And then you have to talk out more credit card debt and get deeper into the hole, because you couldn’t put aside money into an emergency fund.

So! I want you to answer Yes before you apply for that mortgage.

#5 - Do you know how much “home” you can afford per month? 

If you answered “yes, you do know how much home you afford per month,’ congratulations, you can skip ahead.

If you answered “No or Maybe” congratulations as well! Because you’re in the right spot, in a later episode we'll be using some calculators to exactly find out how much home you can currently qualify for.

But since we’re not in that stage yet, why don't we first use your current rent to see how that impacts your budget. It's a good baseline to determine if you're already stretched thin or if you can afford more. So don’t worry if you answered No on this one, we’ll be answering this one together in a later episode.

#6 - Are you willing to make lifestyle sacrifices?

Besides the financial burden of a mortgage, there have to be some lifestyle sacrifices made when you get into your house. Either you have to learn to cook for yourself, meaning that you stop going out everyday or every weekend or you have to commute more. Or you have to spend your weekends maintaining your yard because it needs to be mowed, or blackberries keep growing, you name it! Things that you don’t like doing, but have to be done because now you’re a homeowner.

Another thing you have to consider before buying a home is if you plan on starting a family or a business! You’ll have to decide where to put your life savings (your capital), your time, and where’s all the money coming from to pay for daily/monthly expenses? Is it going into your home or into the new business?

#7 - Do you want to stay in the same area long term? 

Last but not least! Do you want to stay in the same area long term? Pretty simple question, maybe a little bit arbitrary, so let’s say… 5 or more years? Now why 5? I’ll get into that a little bit later, but use that as a baseline. Have you considered:

• • • Raising a family?
    • Have you considered retiring?
    • Growing old?
    • Will your job make you move?
    • Have you explored the environment?
    • The climate?
    • The people?

I know here in Western Washington we have something called the seasonal affective disorder and that’s when people move here and go, “Why is it so gray? It’s bleak. It’s constantly raining but not where I can actually get wet. I’m so sad, I’m depressed. Where’s my NBA team? Where’s Bigfoot? I don’t see the cast of Frasier or Gray’s Anatomy anywhere. Not filmed in Seattle? What? Now you have to make me learn hockey rules? Oh man!

Yeah! Sometimes it’s best to rent in an area before deciding to buy

Welcome my Buyer's Guide! This guide will cover the following:

Knowing how much you afford is especially tough if you've never talked to an actual mortgage professional. Obviously, if you're paying all-cash that's different because you have a finite amount you control, but with a mortgage your chunk of cash is dictated for you.

If you're thinking about buying, but haven't fully committed to the point you've spoken to a lender/mortgage professional. Then this section is for you. It'll determine for a ballpark estimate at what you'll qualify for.

Calculating Your DTI (Debt to Income Ratio)

Unlike those online cooking recipes, I'm going to cut right to the chase. We will being by looking at your Debt-to-Income (DTI) ratio. Lenders look two different forms of DTI, the Front-end and Back-end ratios (more on that below), when determining how much money (if any) they will lend you. Lenders look at your promised long-term incoming and promised out-going monies, otherwise known as your:

• Gross income is the money you make before taxes and deductions.
• Long-term debt is debt you'll be continuing to pay for 10 months or more

And here are some examples of long-term debt:

• Car loan
• Student loan
• Credit card debt
• Personal loans
• Child support
• Divorce settlements (alimony)
• PITI Payments (housing expenses)
• Rent

It's pretty easy to calculate your own DTI, simply take your long-term debt and divide it by your gross income.

If you haven't already, I also highly recommend starting a budget since you'll be researching those numbers anyway. There are many apps that allow you to track your spending and plan a budget. I recommend using Mint - it's a great app and free to boot! Ok, chop chop, lets get to it!

Once you have your numbers

NOTE: Just before you read any further - remember, these are house-hold numbers. If you're married you'll need to combine both spouses' information. If you're single or an unmarried couple you'll just use your individual numbers.

Since I can't see your screen I'll just take a guess at the numbers on your end. Let's say you're paying $1,600 in rent, $100 toward your credit cards interest, and $300 toward student loans. Your monthly debt payments come to $2,000 total.

Now for your gross income. Again, since I can't see your screen I'll just take a guess. Let's say your employer is paying you $6,700 per month before taxes and deductions. (If you are a 1099 worker, this will be the average of your last two years of net income)

This means that your Debt-to-Income Ratio ($2,000 / $6,000 = 0.333) is equal to 33.3%

OK, so what does this all mean?

This is where the 28/36/43% Debt-to-Income (DTI) Ratios come into play. These are specific DTI barometers that lenders look at to see how much debt you can take on and still be approved for a mortgage.

The 28% Rule - Total Housing Expenses aka Front End Ratio. Your future housing expenses shouldn't be more than 28% of your gross income. Meaning, if taking out a mortgage would cause you to spend more than 28% of your gross income on housing expenses, the lender would unlikely lend you for the full amount you're looking for. Housing expenses can be categorized as PITI: monthly principal, interest, property taxes, and insurance payments. If you are moving to a place with Home Owners dues, income them here as well. Example: If we know our income of $6,000/mo we can find out our maximum allowable PITI expenses ($6,000 x 28%) are $1,680.

The 36% Rule - Total Debt aka Back End Ratio. This your total "allowable" debt. Meaning, if taking out a mortgage would make you spend more than 36% of your gross income on total monthly debt payments, the lender would unlikely lend you for the full amount you're looking for. This includes the above total housing expenses (PITI) plus any additional debts mentioned in the bullet points above. Example: If you gross $6,000 per month, 36% of that would be $2,160. This means if your PITI has already spoken for is $1,680 of the total allowable of $2,160 then all you are left with is $480 for all other debt obligations (car payments, student loans, etc).

**side note: 28% and 36% are not fixed percentages. Most lenders can accommodate you here and there but it'll come in paying a little bit more per month. However, there is a limit to how much debt you can take on and still qualify for a Qualified Mortgage. and that is the: The 43% Rule - Highest DTI. This is the highest ratio a borrower can have and still get a Qualified Mortgage. Simply put, you qualify for mortgages that aren’t predatory.

So let us get that debt into shape and our credit score polished!

Here's some advice to improve your credit score!

• If you're one of the few that doesn't have credit built already. Start by opening up an Apple credit card and pay it off every month!
• Pay your bills on time
• Keep your credit card balances as low as possible
• Keep current credit cards open. Closing a card can lower you available credit and your score.
• Check your credit report and dispute any errors that are hurting your score

AND HERE'S SOME SUPER ADVICE TO REDUCE YOUR DEBT!

• Remember that "budget" thing? This will help you pay off any loans early by getting a better picture of your spending. Do this by cutting out unnecessary expenses; essentials only! Start by seeing how much money you can contribute each month instead of just the minimum payment.
• Additional income. Ask for a raise, start a side hustle, change jobs. Get out of that comfort zone.
• No new debt or large expenses! These will burden your DTI or reduce the amount you can put down on your house
• Consolidate your debt!
• Pay off high-interest loans right away
• Recalculate your DTI every month until you're comfortable with the percentage.
• Ultimate debt hack: move in with your parents. You can set aside thousands in just a few months. While this doesn't sound like a glamours proposition, in the words of Gary Vee, Sometimes you have to a step backwards to take 3 steps forward.

Increasing you income

Sometimes there's no magic bullet to reduce your debt and you have already a decent credit score. In this case it might make sense to look at ways to increase you income. This subject will be less specific that the previous because while it might be easy to say, it's much harder to achieve. There are also cautionary elements to this because if you go more than 6 months without a job or your rely solely on 1099's versus W2, your income sporadic income might not be the best thing.

1. Start a side hustle
2. Change jobs
3. Learn a new skill/trade
4. Work an extra hour a (show up 30 min earlier and leave 30 later) to become that irreplaceable employee, work overtime, or prove that you deserve that promotion.

There are are lots of youtube videos on these subject so I wont belabor the point. It's not a guarantee but well worth the consideration.

OK! that was lot to take in. When you feel comfortable with your DTI (this might take a little time) it's time to proceed to the next step.