The very first facet of creating a proper budget is for a
person to know their credit rating. There are multiple places where one can
check their credit score, and the actual credit rating will have a significant
impact upon the loan that one can get. A professional Realtor, such as Ron
Shelton of Breckenridge Associates Real Estate, knows that an individual needs
a credit score of 580 or higher to qualify for a FHA loan with a down payment
of 3.5%. Conversely, those who have a credit rating from 500 to 579 will need
to make a down payment of at least 10% of the property's value, and those with
a credit rating of less than 500 are usually unable to secure a FHA loan. (3) Right
away, one can see that a person's credit score has a major impact upon the
ability to purchase a home, and this impact continues onward to other areas as
well.
The amount of the down payment is another key part of
creating a budget. One thing that many prospective homeowners fail to research
are hidden costs. One aspect of securing a loan that is often overlooked is
private mortgage insurance (PMI). If a person makes a down payment of less than
20%, then the lender will require the acquisition of PMI to protect the lender
from losing money if the home ends up in foreclosure. The rate for a PMI can
vary, depending upon the down payment and the individual's credit score.
Usually, the PMI averages between 0.3% to 1.5% of the original loan amount per
year, which can add a sizable chunk to one's expenses. However, having to keep
a PMI is not a sure thing. Licensed Realtors, such as Ron Shelton of
Breckenridge Associates Real Estate, can inform prospective homeowners that the
PMI is automatically cancelled when the loan balance drops to 78% of the home's
value, and one can ask the loan lender to drop the PMI requirement when the
loan balance drops to 80% of the home's value. (4)
As for creating a budget to purchase a home, a Realtor, such
as Ron Shelton of Breckenridge Associates Real Estate, will remind their
clients of the basic rules of home affordability. It's considered standard that
the maximum mortgage payment that one makes not exceed 28% of one's gross
monthly income. The second rule is that the total housing payment (mortgage,
property tax, PMI, home association fees, and homeowner's insurance) not exceed
32% of one's gross monthly income. The third and final rule is that a person's
monthly debt payments (credit cards, car payments, student loans, etc.) not
exceed 40% of one's gross monthly income. (5) With these numbers, one can sit
down and begin crunching the numbers. A proper budget considers every aspect of
a person's life, such as food, clothing, entertainment, utilities, travel, and
every other expense that normally crop up. Once all the numbers are plainly
listed, one can then figure out the monthly mortgage payment that can be
afforded. Numbers do not lie, so one may realize that they have to cut expenses
in order to afford the home that they wish. Creating a budget may show that
waiting a year to accumulate enough cash to make a larger down payment will
save a great deal of money over the course of the loan.
Realtor Ron Shelton of Breckenridge Associates Real Estate
notes, "Having a budget is crucial in determining if one can afford to buy
a home. Total honesty is needed when crafting a budget, and everything has to
be included, from groceries to enjoying happy hour at the local bar. Knowing
one's current credit rating is also key as it impacts the type of loan and
interest rate that one can get. The good news is that a person can raise their
credit score by making regular payments and reducing their debts. A proper
budget will spell out how much one can afford to pay for a monthly mortgage,
and we have an in-office calculator to help our clients crunch the numbers. We
can also highlight some hidden expenses as well as remind people to budget for
unforeseen things, such as appliance repairs. If a person sits down and draws
out a detailed and comprehensive budget, then they will know exactly how much
real estate that they can afford and what type of loan to shoot for. There's
nothing like having a solid budget for peace of mind when looking to purchase a
home." (6)
As one can see, having a solid budget is a necessity when
deciding to purchase a home. A budget will show how much one can afford to pay
for a monthly mortgage, as well as showing areas that may need to be cut back a
bit. While many people are loath to honestly look at their living expenses, an
honest budget can be one's biggest ally when deciding on whether or not to buy
a home. A true budget will show the strengths or weaknesses of one's personal
finances, which can then lead to some needed changes taking place. In the end,
a budget will provide one with all the information that they need on whether
they can afford to purchase a home or not.
References:
1) http://realtormag.realtor.org/daily-news/2015/01/30/home-ownership-rate-falls-20-year-low
2) http://www.townofbreckenridge.com/index.aspx?page=368
3) http://www.bankrate.com/finance/mortgages/7-crucial-facts-about-fha-loans-2.aspx
4) http://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx
5) http://www.moneyunder30.com/how-much-house-can-you-afford
6) Quote from Realtor Ron Shelton of Breckenridge AssociatesReal Estate
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