Before you can think about buying your first home you need to make sure that your finances are in order and that you have planned wisely and thoroughly - even before the mortgage approval process even begins.
Here are some positive signs that you are financially ready to proceed:
Positive cashflow & adequate debt-to-income ratio: You are bringing in more income that you are spending on servicing debt payments and everyday expenses. The debt-to-income ratio is one way lenders can measure your ability to repay debt. This figure can be calculated by dividing your total recurring monthly debt by your gross monthly income. Lenders look for a debt- to-income ratio averaging 36%-43%. Keep in mind that these ratios are based on gross income prior to taking taxes into account - when in reality we pay bills with net income after taxes.
Before considering a mortgage, it is advisable to try and pay off as much or your outstanding consumer debt as possible. If you are only able to pay monthly minimum credit card payments, and/or are watching your balances increase every month, your #1 goal should to become debt free first. If you are able to pay off your credit card balances monthly and still have sufficient funds remaining to service a mortgage, you are definitely a candidate for buying a home.
FICO score: Your FICO credit score is 700 or above. A perfect FICO score is 850. The higher the score the lower the interest rate.
You have saved sufficient enough funds for a down payment: Typically, lenders require 20% down. On Jumbo loans this figure can be as high as 30%. Exceptions are VA loans, which require no down payment. Note often first-time home buyers are tempted to pull funds from their Individual Retirement Accounts or 401(k) to come up with the qualifying down payment. This should be an option of last choice, as it not only denies you years of compounding interest, but will need to be paid back at some point with post-tax money. A dedicated savings account would be a far better option.
Additional expenses: You have enough funds set aside for closing costs, property taxes (1.18% of the assessed value in San Francisco), homeowner’s insurance, and monthly recurring utilities (water, PG&E and trash). You will want to have enough money for repairs and furnishings to turn your house into a livable home. Unlike renting there is no landlord to call to fix a broken air conditioner or dishwasher. You should not be shaken if you are forced to replace a roof, fence or sump pump.
Job security and commitment to settling down: You have a stable job with a high degree of predictable income. You are planning on staying with your current employer for at least 3-5 years.
Purchasing a home is a big decision. If you can answer “yes” to each of these factors, then it may be time to move on to the next step of getting prequalified, finding a Real- tor, and visiting homes for sale. Your dream of homeownership is now headed toward a firm reality.
All data, including all measurements and calculations of area, is obtained from various sources and has not been, and will not be, verified by San Francisco Examiner.
All information should be independently reviewed and verified for accuracy.
Properties may or may not be listed by the office/agent presenting the information.