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buying a home

Why Three Months Worth Of Income Is Required When Buying A House

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buying a house

Most aspiring homeowners know that you need to have some cash set aside if you’re buying a house. Along with a down payment, earnest money and home inspections mean you typically have to front some cash as the process moves forward. Plus, you might need to cover closing costs.  Especially, if you aren’t getting those covered by the seller. However, not all who attempt to walk the path toward homeownership are aware of the need for a cash reserve, too. It isn’t uncommon for banks to want two to three months’ worth of income available after the home buying process is over. If you’re wondering why that is. Here’s what you need to know about the cash reserve requirement.

What Is a Cash Reserve?

When it’s associated with the home buying process. A cash reserve is an amount of money that would be in savings after the purchase is complete. It represents the amount that would still be available in liquid assets after you cover the inspections. As well as down payment, closing costs, and any other expense that comes with getting a mortgage and buying a home that comes out of your pocket.

What qualifies as a liquid asset can vary from one lender to the next. However, this usually includes money in savings and checking accounts. As well as certain investments and select retirement accounts. If the value of an account could be turned into cold, hard cash quickly, it may count as a liquid asset.

How Big Your Cash Reserve Needs to Be

Each lender can dictate the required size of your cash reserve. As long as it follows the rules for your mortgage type. For a VA or USDA loan on a house that will be the buyer’s primary residence, there isn’t usually a cash reserve requirement. If you are getting an FHA loan, it’s generally at least three months of mortgage payments.

With a conventional mortgage, you might see a wider range of cash reserve minimums. Some lenders only require two to three months’ worth of mortgage payments to be available. Others make two to three months of income mandatory. At times, you might even need six or 12 months set aside.

It’s important to note that the kind of property you purchase can play a role. If you are buying a house that you’ll use as a primary residence, you might have a smaller cash reserve requirement than if you purchase a vacation home or investment property.

Additionally, your credit profile may also be a factor. Those with stellar credit might be able to have less in a cash reserve than those with good or fair credit. The loan-to-value ratio is also taken into consideration when a lender set the mandatory minimum, so those who make substantial down payments might encounter a less demanding cash reserve requirement.

Why Lenders Require Cash Reserves

Having a cash reserve after a home purchase benefits both the buyer and the lender. It ensures you have money available to handle the unexpected, decreasing the odds that a financial hardship will cause you to miss a mortgage payment.

Essentially, your cash reserve gives the lender peace of mind. When you secure a mortgage, the lender is taking a risk. With that money stashed away, the risk may seem less daunting as they will be fairly certain that you can keep up with your payments even if a financial emergency strikes.

Buying a House-Cash Reserve May Be Mandatory

While building your cash reserve might be challenging, it’s a necessity if your lender makes it mandatory. However, you might be able to explore other lenders or loan types to bring the amount down, though that isn’t always an option.

Ultimately, it’s wise to learn about cash reserve requirements in advance and work to get some money set aside. That way, you can be ready for whatever the lender requires, ensuring you can move forward when you find your ideal property.

 

Do you think having three months’ worth of income before you can buy a house is reasonable? Why or why not? Share your thoughts in the comments below.

 

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Real Estate – The Ultimate Forced Savings Plan

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Home Owning as Savings
Real estate prices have been sky high, jumping out of reach for many first-time home buyers. If they could build their savings fast enough, high enough, they could get into their first home with no problem. As it turns out, getting into your first home is half the battle.

Those of us who have been in the real estate industry for a long time and have seen high-appreciation cycles before remember an old aphorism: “Real estate is a game of musical chairs, but you have to buy your first chair.”

The Way it “Should” be Done

In an ideal world, a prospective homebuyer would save enough for a 20% down payment while increasing (and stabilizing) their income and polishing their credit scores. Such a buyer has nearly unlimited options for mortgages, and is sure to get an excellent deal if they shop intelligently.

In the real world, most first-time homebuyers can’t save fast enough to get to that 20% down payment. Some just don’t make enough, and some just don’t have that “saver” gene. For them, real estate prices escalate ever further beyond their reach. What can they do?

Buy and Save Now

The quick and easy answer? Buy now, or as soon as you can qualify. Some will point out that it is risky to buy with as little down as possible, and they would be right. However, there is one little-talked-about financial benefit of buying as soon as you can: it is the best forced savings plan ever.

When you buy a home you invariably will pay more for your total monthly expenses – mortgage payment, property taxes, insurance and possibly mortgage insurance and HOA dues – than you currently pay for rent. So when you decide to buy instead of rent you will now be spending and saving less than you were as a renter. Or is that actually true? Let’s look closely at this assumption.

Start Saving With Your Home Purchase

First, while most of your mortgage payment goes to paying interest on the money you’ve borrowed, a portion actually goes to principal. Why is that important? That portion of your mortgage payment which goes to principal is not an expense! Since it pays down your mortgage balance it’s actually an investment – you are investing into more equity in your home. On a typical 30-year $200,000 mortgage at 4.000% your payment (principal and interest) would be $954.83. But only $666.67 of that is interest in the first month. $288.16 is principal, and that number grows slightly every single month. You are therefore saving $288.16 (and a little more every month) in a “forced” savings account.

Your investment in your home is probably earning money through appreciation, too. Let’s say the property is appreciating by 3% per year. Not spectacular, but respectable. In our example we’re looking at a purchase price of about $210,000, so your investment would earn $6,300 the first year.

But wait – you didn’t invest $210,000. Your 5% down payment was only $10,500. Add some closing costs and maybe you’re into the property for about $15,000 in cash. Your first-year return on investment ($6,300 on a $15,000 investment) is 42%! This is called leverage. When you invest using other people’s money the return on your own money is spectacular.
So now we’re “saving” $288 or more each month, and our initial $15,000 investment is earning another $6,300 plus per year. At the end of the year you would have $20,256 in equity. ($10,500 down payment + $288 x 12 principal buy-down + $6,300 equity growth = $20,256.)

If you put $15,000 into a savings account at 3% interest and added $300 per month (to round up) every month for a year at the end of the year you would have about $9,100 in the bank. Not even close, and the difference grows over time.

Home Ownership is Saving

Home ownership is a “forced” savings account because once you own the home, you have no choice – that monthly housing cost has got to be paid no matter what, or your initial down payment and your credit are at risk. You would be surprised at how motivating that can be. Home ownership can be an outstanding way to force yourself to be more frugal in the rest of your spending so that you can save and build equity in your home.

Another great money-saving benefit of owning a home is the ability to write items off on your taxes. Homeowners get to deduct a lot of the costs associated with owning a home.

Interest, property taxes and mortgage insurance are all tax-deductible. We already know that you’ll be paying $954.83 in interest in the first month. Property taxes depend heavily on what state and even county you’re in, and mortgage insurance depends on the amount of your down payment and your credit history. Let’s assume they add up to another $400 per month (give or take). You now have about $1,350 in tax-deductible expenses every month. If you are in a marginal tax bracket of 15% (consult your tax advisor) then you are saving about $202.50 per month on your taxes. When you think about it, Uncle Sam is actually paying for a good chunk of your monthly housing payment this way.

Home Owning is Different Than Traditional Savings

The above example is overly simplified. Home ownership is a sort of forced savings but it is a savings account that you won’t be allowed to touch. For instance, your savings isn’t liquid because you can’t easily access your growing equity, and selling your property eventually will cost money. Your tax situation may make the tax benefits greater or lesser than out example. And of course, real estate doesn’t always appreciate – although lately it’s been appreciating a great deal more than our assumptions.

The bottom line is that you could stuff money into savings and investments or become a solopreneur – and there’s nothing wrong with that – or you could just go ahead, bite the bullet, buy your home now and live a little more frugally for a couple of years. You’ll not only be forcing yourself to save, but you will have invested in one of the most rewarding and secure investments there is, given enough time.

If you have a highly variable income, or if you have a spending problem or are terrible at managing debt, this strategy is probably not for you. But if you’re wondering whether to buy now or buy later, it’s worth thinking about it – now could be the perfect time.

Casey Fleming, Author
The Loan Guide: How to Get the Best Possible Mortgage (Available on Amazon).

Real Estate – The Ultimate Forced Savings Plan

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Home Owning as Savings
Real estate prices have been sky high, jumping out of reach for many first-time home buyers. If they could build their savings fast enough, high enough, they could get into their first home with no problem. As it turns out, getting into your first home is half the battle.

Those of us who have been in the real estate industry for a long time and have seen high-appreciation cycles before remember an old aphorism: “Real estate is a game of musical chairs, but you have to buy your first chair.”

The Way it “Should” be Done

In an ideal world, a prospective homebuyer would save enough for a 20% down payment while increasing (and stabilizing) their income and polishing their credit scores. Such a buyer has nearly unlimited options for mortgages, and is sure to get an excellent deal if they shop intelligently.

In the real world, most first-time homebuyers can’t save fast enough to get to that 20% down payment. Some just don’t make enough, and some just don’t have that “saver” gene. For them, real estate prices escalate ever further beyond their reach. What can they do?

Buy and Save Now

The quick and easy answer? Buy now, or as soon as you can qualify. Some will point out that it is risky to buy with as little down as possible, and they would be right. However, there is one little-talked-about financial benefit of buying as soon as you can: it is the best forced savings plan ever.

When you buy a home you invariably will pay more for your total monthly expenses – mortgage payment, property taxes, insurance and possibly mortgage insurance and HOA dues – than you currently pay for rent. So when you decide to buy instead of rent you will now be spending and saving less than you were as a renter. Or is that actually true? Let’s look closely at this assumption.

Start Saving With Your Home Purchase

First, while most of your mortgage payment goes to paying interest on the money you’ve borrowed, a portion actually goes to principal. Why is that important? That portion of your mortgage payment which goes to principal is not an expense! Since it pays down your mortgage balance it’s actually an investment – you are investing into more equity in your home. On a typical 30-year $200,000 mortgage at 4.000% your payment (principal and interest) would be $954.83. But only $666.67 of that is interest in the first month. $288.16 is principal, and that number grows slightly every single month. You are therefore saving $288.16 (and a little more every month) in a “forced” savings account.

Your investment in your home is probably earning money through appreciation, too. Let’s say the property is appreciating by 3% per year. Not spectacular, but respectable. In our example we’re looking at a purchase price of about $210,000, so your investment would earn $6,300 the first year.

But wait – you didn’t invest $210,000. Your 5% down payment was only $10,500. Add some closing costs and maybe you’re into the property for about $15,000 in cash. Your first-year return on investment ($6,300 on a $15,000 investment) is 42%! This is called leverage. When you invest using other people’s money the return on your own money is spectacular.
So now we’re “saving” $288 or more each month, and our initial $15,000 investment is earning another $6,300 plus per year. At the end of the year you would have $20,256 in equity. ($10,500 down payment + $288 x 12 principal buy-down + $6,300 equity growth = $20,256.)

If you put $15,000 into a savings account at 3% interest and added $300 per month (to round up) every month for a year at the end of the year you would have about $9,100 in the bank. Not even close, and the difference grows over time.

Home Ownership is Saving

Home ownership is a “forced” savings account because once you own the home, you have no choice – that monthly housing cost has got to be paid no matter what, or your initial down payment and your credit are at risk. You would be surprised at how motivating that can be. Home ownership can be an outstanding way to force yourself to be more frugal in the rest of your spending so that you can save and build equity in your home.

Another great money-saving benefit of owning a home is the ability to write items off on your taxes. Homeowners get to deduct a lot of the costs associated with owning a home.

Interest, property taxes and mortgage insurance are all tax-deductible. We already know that you’ll be paying $954.83 in interest in the first month. Property taxes depend heavily on what state and even county you’re in, and mortgage insurance depends on the amount of your down payment and your credit history. Let’s assume they add up to another $400 per month (give or take). You now have about $1,350 in tax-deductible expenses every month. If you are in a marginal tax bracket of 15% (consult your tax advisor) then you are saving about $202.50 per month on your taxes. When you think about it, Uncle Sam is actually paying for a good chunk of your monthly housing payment this way.

Home Owning is Different Than Traditional Savings

The above example is overly simplified. Home ownership is a sort of forced savings but it is a savings account that you won’t be allowed to touch. For instance, your savings isn’t liquid because you can’t easily access your growing equity, and selling your property eventually will cost money. Your tax situation may make the tax benefits greater or lesser than out example. And of course, real estate doesn’t always appreciate – although lately it’s been appreciating a great deal more than our assumptions.

The bottom line is that you could stuff money into savings and investments – and there’s nothing wrong with that – or you could just go ahead, bite the bullet, buy your home now and live a little more frugally for a couple of years. You’ll not only be forcing yourself to save, but you will have invested in one of the most rewarding and secure investments there is, given enough time.

If you have a highly variable income, or if you have a spending problem or are terrible at managing debt, this strategy is probably not for you. But if you’re wondering whether to buy now or buy later, it’s worth thinking about it – now could be the perfect time.

Casey Fleming, Author
The Loan Guide: How to Get the Best Possible Mortgage (Available on Amazon).

Saving Money on Your First Home Purchase

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Saving Money Buying a Home

Buying a home. It’s a quintessential part of the American Dream and, to this day, still one of the main goals to which millions of Americans aspire. But it is no small decision, and it’s something that takes a great deal of research and preparation to build towards. Buying a house is a difficult process whether it is your first or third time, so you can imagine how daunting it is to try to figure it out yourself without any prior experience.

One of the main things that you are likely concerned about when entering the housing market for the first time is the price. Naturally, you want to keep the costs as low as possible, without sacrificing on the things that are really important to you. Here are some ways to keep the costs down and save money on your first home purchase.

Shop Around for a Good Loan

It is not exactly a thrilling process to visit different banks and lenders to find a good mortgage on a house, but it is one of the most important parts of buying a new house. Don’t be tempted to simply take the first offer that you receive on a loan. Instead make sure that you shop around and be discerning in your final decision. You also need to make sure that you have a realistic budget set aside, for how much you can spare each month without harming your finances seriously.

Know Your Limits

Lenders will decide your loan amount based on your credit and tax information, but occasionally they will approve loans that are slightly above what you can really afford. It is important that you know what you can and cannot afford before you even go to the mortgage lender. You don’t want to end up with a house purchase that is going to put you in severe debt for the rest of your life. For this reason, you need to stick firm to your upper limit. It is also important to remember that, even if you see a good deal on a bigger house, there are things like higher utility costs to take into consideration.

Use a Realtor

You may have heard talk of the web making things so much easier when it comes to buying houses in this modern age. And while, yes, it is definitely a lot easier to buy and sell a house yourself today, it would be a mistake to forgo a realtor altogether. Especially for a first time home purchase, a realtor can lend expertise and knowhow that in invaluable to a novice, not to mention they will do most of the hard work for you. How does paying for a realtor save you money? They are likely to get you a much better deal on a property than you could ever get on your own.

Don’t Limit Your Search

Some people have preconceived ideas about what they want their first house to be like, but sometimes you have to realize that when you are entering the market for the first time you may have to make certain compromises. Of course, there are some things that are essential to each home buyer, so the best technique is to work with your realtor to put together a list of things that you would like (but are not necessarily deal breakers) and a list of your non-negotiables.

Decide What It’s Worth Spending On

This is another thing that your realtor can help you out with. Think about the things that you want out of a house, and which things you are will to pay for. For example, a home inspection and a home warranty are things that you will want to budget for, while extensive renovations might be something that you want to avoid. Again, it comes down to personal preferences, but all of the aforementioned are the kinds of decisions you will want to think about before you choose a house.

Photo: Flickr: reynermedia

Planning to take a home loan? Raise your eligibility level with these tricks

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Home Loan Eligibility
A dream home is on almost every individual’s wish list and people invest most of their savings towards getting one. Since buying a home is such a vital decision, you must proceed wisely and without haste.

A lot of home loans are available in the market, which take you a step ahead in your efforts of getting the home you always wanted. But, before applying for a home loan you need to raise your home loan eligibility as it makes securing a home loan easier.

What is a home loan and what makes you eligible for one?

A home loan is different from other loan processes as it involves larger funds and is spread over longer periods. However, an application for a home loan will only be accepted if you’re eligible as per the financing institution’s requirements.

Home loan eligibility, simply put, is a measure of your financial status and repaying capability. Your eligibility for a loan does not simply depend on your pay scale. There are a number of other factors that will be taken into consideration including your monthly salary, your age, credit ratings and your employer, among others.

There are different ways by which you can increase your eligibility and get the loan you desire. Some of the steps that you can take to better your chances at securing a home loan are

1.Go for a loan with a longer repayment period

When deciding about the loan tenure, choose a longer time period. This will assure lenders that you’re committing towards repaying your loan over a longer time frame, which in the long run is beneficial for them. This might also help you raise a higher home loan amount than before.
You can employ the help of a home loan EMI calculator to get an idea of your eligibility and the maximum loan amount you can secure. This will also help you determine the ideal time period in which you can clear off the loan amount.

2. Taking care of your existing loans

This is especially applicable to individuals who already have existing loans and are in the last stage of repayment. Prior to applying for a home loan, pay off your existing loans as it will help you get a better credit rating. By clearing off your existing debt, you will also be able to prove that you have sufficient finances to pay the monthly installments of your new loan.

If it’s not possible to pay them off, decrease the EMI amounts, or extend the repayment period. However, this might not be very helpful because financial institutions are more concerned about your existing debts than how you’re going to clear them.

3. Mention the extra incentives, occasional bonuses, and other sources of income

As an employee, you might be rewarded with festive bonuses, incentives, or perks by your employer. Mentioning this as a part of your net income will increase your chances of raising a higher loan amount.

If you’ve other sources of income like rental apartments, fixed deposits, or other businesses, then listing them will also add to your home loan eligibility, thus helping you get your loan approved.

4. Include your spouse or parents as loan applicants

A working spouse or parent can also be included as loan applicants. Involving them means more disposable income and financial stability on your part. No matter whom you include as a co-applicant, ensure that they have relevant documents that support their income.

Taking these steps will go a long way in increasing your eligibility and securing a home loan. Follow the above-mentioned steps to assure the lending institution that you have the ability to repay your loan with minimal hassles.

Photo: Flickr: GotCredit

4 Things Every Homeowner Should Know

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Things Every Homeowner Should Know
If you are like most people, your home is your largest investment and you want to take great care of it. Some people will complete do-it-yourself projects, others will hire a contractor to assist with repairs, maintenance work and upgrades. Regardless of the approach that you take to keep your home maintained in great condition, one thing is certain: There are some things that you need to know about your home if you want to keep your home maintained and in the best overall shape.

Think about each of these points and consider educating yourself about each of them. These steps will help you to take better care of your home now and in the years to come.

Where the Master Controls Are

As soon as you move into a new home, it is important that you familiarize yourself with the master controls. This may include the electric submeter, gas valve and main water valve. These are very important features that you may rarely need to access, but in a time of emergency, it is critical that you know where they are and how to make adjustments to them without delay. Therefore, if you do not know where these features are in your home, today is the day to educate yourself. They are usually located on the outside of the home or in the basement (if your home has a basement). Be sure you know where these things are.

What is Included in Your Warranty

Many homeowners have a home warranty in place, and there is good reason for this. A home warranty will pay for most of the repair costs on different components to your home. However, the warranty coverage can vary from plan to plan. Some may only have coverage on major components, such as the HVAC system. Other warranties may have coverage on doors, windows, major home appliances and various other features throughout the home. As a homeowner, you will be able to keep your home in better condition and take full advantage of the warranty that you have paid for when you read through the coverage and are aware of what your coverage entails.

The Age of Your Home’s Components

There are numerous major components to a home that each have a different life span. For example, a hot water heater may have a lifespan of approximately 10 years while an asphalt shingle roof may have a lifespan of approximately 20 to 30 years. When you have a newer home, it is easy to know the age of the components, and this is because many or all of them may have never been replaced. However, if your home is more than 10 years old, there is a chance that some of them may have been replaced already. It is important that you know how old your components are, such as the roof, hot water heater, HVAC unit, electrical system, pipes and many other components of your home. It is equally important to know what their life span is so that you can be more prepared to make repairs or a replacement as they reach the end of their useful life. A happy home is a home that you don’t have to worry about anything breaking.

The Cost to Replace the Components

Along this train of thought, it is critical that you also understand the cost to replace each of the components. This is especially true when some of your components are reaching the end of their life. For example, if you have a 20 year old HVAC system, it should not come as a surprise when the HVAC technician recommends a replacement to you rather than more repair work. Ideally, you will have been budgeting for this expense and will be prepared to make the payment when the time comes to replace the components.

Your home is likely one of your largest investments (if not the largest) and you want to keep it well-maintained during the years in which you live there. A warranty may make it easier for you to budget for repairs and to repair your home as needed, but there are other factors to consider as well. For example, you must be prepared to replace major components when the time comes, and you should be aware of where your main valves are for emergency situations. These tips will help you to better protect your home and to keep it in great condition over the years.

Photo: Flickr: deovolenti