How many of you have watched shows on the HGTV channel where people are looking to buy homes? The person tells the Realtor or Broker that they have a certain amount for a down payment and have been approved for a certain loan amount. The Realtor or Broker than says their total budget is the amount of the down payment plus the loan amount. WRONG!!! Folks that is super bad. You cannot include your down payment into your total purchase price. Let’s say that you have been approved for a loan of $300,000. You have been diligent and have saved 20% as a down payment ($60,000) plus closing costs. This does not mean that you can look at houses that cost you $360,000. You can afford a house that costs $300,000 or less. Your loan will be for $240,000. This gives you a 20% equity on your house. Your closing costs include things like appraisal, insurance and interest for the first month, funding fees, etc.
If you do not have the 20% down, then you are going to need Private Mortgage Insurance (PMI) or to pay a higher interest rate to avoid the PMI. The PMI should go away once you have achieved the 20% equity on your home. You will need to keep up on this because your bank might not let you know when you’ve achieved the 20% equity. Be careful when you buy a home. Make sure you aren’t carrying a lot of consumer debt (credit card debt, loans, car loans, student loans, payday loans, etc.). The consumer debt affects your income to expense ratio. You want the ratio low in order to have a chance at qualifying for loan. If your debt to income ratio is to high (above 35%), forget it. The bottom line before you think about buying a home is to get your consumer debt paid-off. Save for your 20% down payment and closing costs. Remember that the cost of owing a home is not just the mortgage, insurance, and taxes. It also includes maintenance, replacement for appliances, alarm, and other expenses.