First-Time Homebuying: The Beginning Stages

December 9, 2022

by Christian Phillips

The early stages of first-time homebuying can be intimidating. To alleviate stress, Frandsen Bank & Trust has identified the following elements prospective homebuyers should consider before proceeding with the process.

Should I rent or own?
The process of deciding whether to rent or own can be challenging. Examine the advantages and additional factors to determine which option best suits your situation.
Renting advantages: Renting can cost less, provides shorter-term commitments, is more flexible for situations that require relocation (Job/education), and maintenance repairs are often the property owner’s responsibility.
Owning advantages: Owning a home can provide stability, help build equity, the property value may appreciate, possible tax incentives, mortgage payments could be cheaper than rent, and renovations can be done on your own accord. 
How much can I afford?
Depending on the location, renting or owning can be the cheapest option. For example, transitioning from $800 rent to a $1,400 mortgage payment may strain finances.

Supplemental variables:
Career: (Job security) Becoming a homeowner requires financial responsibility. Determine whether or not job security will be an issue before proceeding with the home-buying process.  
Education: Education status does not restrict prospective home-buyers entirely. Secondary education can be expensive, and renting may be the most viable option.
Personal objectives: (Commitment) How long do you plan on living in the house? Consider factors such as relocating for business purposes and life-changing events.

What is Debt-to-Income Ratio:
Debt-to-income ratio (DTI) compares the consumer’s monthly debt payments to their total monthly income. DTI should be calculated with the consumer’s gross monthly income.
[Definition]
  • What is gross monthly income? The amount earned before taxes and other deductions. Outline financial responsibilities such as rent, auto, credit card payments (minimum), monthly alimony, child support, and other notable fixed or revolving debt.
Lenders will assist with the debt-to-income ratio calculations to help determine your creditworthiness. The lower the DTI ratio, the lender will be more inclined to approve credit inquiries. Borrowers need a DTI of 50% or lower to qualify for most loan products.

How Do I Pre-Plan:

The pre-plan process involves outlining your financial picture to help determine your creditworthiness. What is the status of your savings account? Lenders recommend that borrowers have enough money to cover unplanned expenses for up to three months after supplying the initial down payment on a house. Creating a budget can help build financial stability so prospective home buyers can meet this expectation.
Easy budget guide:

  1. Calculate all sources of income to understand how much money will be available before financial obligations are paid.
  2. Evaluate expenses by listing monthly responsibilities such as rent, phone bills, utilities, car payments, car insurance, medical expenses, entertainment, eating out, and other notable expenditures.
  3. Subtract the two variables – For example, net pay equals $3,275 and expenses $2,175. The consumer’s available income after financial obligations each month equals $1,100.
  4. The execution of the budget plan includes allocating a percentage of the $1,100 to a savings account. With $1,100 remaining, setting aside at least 50% would be recommended.
[Final Thoughts]
The beginning stages of first-time homebuying will prompt questions to which prospective homebuyers should provide definitive answers. In addition to the advantages of renting or owning, supplemental variables such as career, education, and personal objectives should be considered in the decision-making process. Understanding the debt-to-income ratio and pre-plan process can help buyers comprehend their complete financial picture before deciding to enter the housing market. Contact a Frandsen Bank & Trust mortgage lending expert today for more information!

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