Realtors receive a lot of questions from buyers, especially first-time homebuyers. Part of the value you receive by hiring an agent is the knowledge that agent has gained from experience.
Question # 1: When should I get pre-approved for a mortgage?
Typically, the best time to get pre-approved for a mortgage is just before you start looking for homes to purchase.
When you first contact your chosen lender, they will likely let you know what documents they require to issue a pre-approval. Pre-approval helps you decide what you can afford by confirming how much you’re qualified to borrow.
Keep in mind, just because you qualify for a high amount doesn’t mean that you should borrow that amount. In other words, when it comes to purchasing a home, you should be conservative. Borrowing less than your pre-approval amount is okay.
A mortgage pre-approval letter also puts you a step ahead of other prospective buyers who aren’t pre-approved, and in a fast market, that makes all the difference!
Each lender is different, but these are documents typically required for a pre-approval:
- Last Two Paystubs
- Last Two Years' W-2 Forms & Previous Two Years Tax Returns
- 2-3 Months of Bank Statements
- Proof of Social Security Number
- Self-employment files. (If you are self-employed, you will likely have to provide additional documents throughout the mortgage pre-approval process.)
- Gift letters, if applicable. (If a relative or friend is going to supply funds to help you cover your down payment, you must provide a gift letter along with your other mortgage documents.)
Question #2: Can I buy a home before my current home sells?
If you decide to purchase a home before selling your old one, this will give you more time to move. Likewise, this means that you have more time to get your home ready to put on the market.
Keep in mind that if your home does not sell for a while, you could be paying two home loans for a significant amount of time. Additionally, when it comes to mortgage approval, it’s more difficult to receive a new home loan if you have two mortgage payments since you have a much greater financial debt-to-income ratio.
Consider some of these options before committing to two mortgages:
Become a Landlord
If you buy your new home, but you can’t immediately find a buyer for your old home, one option is to rent your old home. This option would help you cover the mortgage payments while you move into your brand-new home. Additionally, a lender may consider this rental income in calculating your debt-to-income ratio.
If you’ve chosen to start looking for a brand-new home before selling your old one, you can also line dates up by asking the seller to add a contingency clause to your sales contract. This clause simply states that the new purchase is contingent upon the sale of your current home. Keep in mind, this isn’t always possible, and it depends on your local market.
Ask your real estate agent about any instant offer programs or "buy before you sell" options that are offered at their brokerage. For example, all agents at JPAR Rocket City have access to JPAR SureSale, which connects sellers with multiple buyer options based on your particular needs.
Consider a Bridge Loan
Lastly, you may consider a bridge loan. This is a short term, high-interest rate loan to cover the down payment on your new home before selling your old one. Once your old home sells, you can pay back the bridge loan.
Question #3: How big of a home can I afford?
The size of your down payment makes a significant impact on how much home you can afford. Essentially, the higher your down payment, the less money you’ll have to finance. This means that your mortgage payments will be lower, and you can potentially pay off your home faster.
Maxing out your income to purchase a home is never a good idea. When purchasing a home, it’s important to make sure you have enough room in your budget for emergency situations and unanticipated expenses.
The general consensus is that homebuyers should invest no greater than 28% of their gross monthly income on real estate expenses and no more than 36% on all their debt obligations (which includes student loans, car expenses, credit card payments, etc.).
The 28/36 percent rule is a reliable home cost guideline that establishes a standard for what you can manage to pay every month.
Depending on where you live, your yearly income could be ample to cover a home mortgage, or it could fall short. Knowing what you can comfortably afford will help you make the best financial decisions. The last thing you want to do is jump into a 30-year mortgage that’s too expensive for your budget.