Recent Divine Discussions

Thursday, August 2, 2007

My Financial Picture for Home Buying

Back in February, I was referred to a real estate agent from a close friend. The guy I had been working with prior to then, was fairly new to the game and wasn't giving me the info I needed. I contacted the new agent and spoke to him about his company and his years and quality of experience. I was confident in him and what he could do for me and decided to take him on as my realtor. I was very upfront with what I was looking for. Here is the list I gave him:

  • Single family home preferably (I am open to a townhouse or condo if a single family home meeting my requirements couldn't be found)
  • Purchase price: $200K or less (Based on how much home I can afford)
  • No down payment
  • Little to no HOA fee (No higher than $50 a month or equivalent)
  • Good condition. No "handyman specials". (I am a single mom. I don't have the time nor the patience to fix up folk's mess. I prefer a home that isn't missing the kitchen cabinets or a backyard that needs complete renovation.)
  • 3+ bedrooms
  • 1200+ square feet
  • In the Orlando area. Preferably around downtown or east side
  • Quiet and safe neighborhood (Need I say more??)
My requirements are pretty simple and achievable. My Realtor thought so also. After going over what I was looking for he forwarded my list to the company's mortgage broker. He looked over my list and took down my information such as income, debt-to-income ratio, etc. After doing some analysis he informed me of 5 major things I should work on and what standing I should be at for each by the time I am ready to apply for a loan. They are as follows:
  1. Credit Score: 720 or higher
  2. Debt-to-Income Ratio: 40% or lower
  3. Credit Balance-to-Credit Limit Ratio: 35% or lower
  4. Reserves: @ least $6000
  5. Closing Cost: @ least $3000
The first is pretty self explanatory. A 720 credit score will get me around a 6.5% interest rate. At least it would have in February of 2007.

The debt-to-income ratio is your monthly expenses divided by your gross monthly income. My monthly expenses consist of my rent, car note, student loan, personal loan, and credit cards. The ratio shows what percentage of you income is available for a mortgage payment after all obligations are met.

The credit balance to credit limit ratio is the total balance on your credit cards divided by the total credit limit. This ratio applies to each individual credit card account and your credit card debt as a whole. Lowering this ratio also increases your credit score.

Reserves consists of a combination of your 401K, savings, assets, investments, etc. Your reserve should equal about two to three months of your estimated mortgage payment.

Closing costs are costs associated with the transaction of executing the mortgage contract and conveying the title to the property to the buyer. The amount varies, but I did some research and 1.5%-3% the loan amount is about average.

I am pretty much on track with all 5. My credit score is currently a 652. Single Ma posted a good comment on keeping track of all your credit scores because you never know which credit score the lender will pull. The brokers I have spoken to say that mortgage companies look at all three scores and take the middle one, which is what I have been going by. I'll still keep the other two in mind. I wouldn't worry to much about Experian because it is extremely close to my Transunion score. Unfortunately my Equifax is extremely lower than the other two. My 3 credit scores are as follows:

Equifax: 613

Experian: 653

Transunion: 652

A 6 year old paid-off collection account that is showing on Equifax seems to be the major factor to the low score. The collection was on my other credit reports but came off 2 years ago. I tried getting it off Equifax but them mofos won't budge. Darn them to heck!! I gotta find a way to get the Equifax score up near the other two.

My debt to income ratio is currently at 46%. Once I reach my credit score goal I will refinance my car loan which should lower my payment by at least $100. I will also refinance my personal loan to get the lowest APR (11%) which will decrease my monthly payment by $50. I am continuing to pay down my debt which will in turn lower my monthly expense by about $120 by February 2008. All this will in turn lower my ratio to 39% meeting my 40% or lower goal.

My current credit balance to credit limit ratio is 47%. Again, if I keep on track with my cc debt payoff plan, my ratio will be 31% by February 2008.

I have already met my reserves goal. My 401K balance is $8765 and my savings balance is $2645. Thats a total of $11410 currently in reserves. I'll increase that by about $8000 by February.

My home purchase fund will basically be used for my closing costs, but only if needed. Ideally I would like to find a buyer that will pay my closing costs. And if the market continues to be a buyer's market by the time I am ready, I am certain I will find someone. If that happens, I will use some of the money in that account to furnish my new home and leave the rest as a E-fund for home repairs.

The financial picture I am trying to achieve is based off my financial profile, information from the mortgage broker, and research I have done. I am pretty confident that achieving these goals will allow me to purchase a nice home with an affordable mortgage. Putting a 20% down payment does not have that much of an effect on your mortgage payment. I have tried all mortgage calculators I could find on the web and the biggest difference between mortgage payment on 100% the purchase price versus 80% the purchase price was $130. So why waste 4 years to save up $20,000 just to save $130 a month?? And in 4 years, $200,000 won't get me the same house. Anyways thats my logic.

For the folks who are looking to purchase a home in the next year or so, what will your financial picture look like right before you start shopping?


Jon said...

Hi there,

I just found your blog and it looks cool. Have house prices started coming down in Orlando? I heard Florida is pretty much taking the lead in the foreclosure crisis today, but it might be mainly Miami. It might not hurt to wait a a year or two, though. Maybe $200k will actually buy a better house!

House prices where I live are really, really high right now so I'm hoping they'll come down in the next few years.

Also, I think the biggest benefit of a 20% down payment is that you don't need "private mortgage insurance" which could save you $150 a month or so in addition to the $130 a month you found.

Dimples said...

@ jon


House prices have gone down considerably in the past 6 months. I get a weekly email of homes for sell that fall into the criteria I set and I have seen prices drop about an average of $20K-$30K. I don't think the buyer's market will last one or two years. I definitely don't want to take those chances. My first home will only be a starter home or me. I plan on upgrading 2 to 3 years after I purchase it.

PMI is also tax deductible which would lower my taxable income and increase my tax refund. Therefore I would get that money back and then some.