"I’VE FOUND A HOUSE THAT I REALLY WANT TO BUY, BUT THE AMOUNT I’M PRE-APPROVED FOR IS SLIGHTLY LESS THAN WHAT THE SELLER IS ASKING. DO I HAVE ANY OPTIONS? OR SHOULD I KEEP LOOKING?"
The answer to that depends on how much less you’re pre-approved for. If the home is truly out of your price range, you really should move on and look for a home that you can afford. However, if the difference between the seller’s asking price and what you’re approved for is a small amount, there are several possible ways to close that gap, including:
• Working with your lender to increase the amount you’re approved for.
• Putting down a larger down payment.
• Negotiating with the seller to lower the price.
Before you do anything else, though, you should talk to your broker. Although it may not always be feasible, some borrowers are able to get approved for a larger amount, especially if the difference between the pre-approval and the asking price is minimal. A pre-approval is not necessarily set in stone, so definitely touch base with your broker. Also, make sure you bring your real estate agent into the loop so that they’re aware of the situation.
In simple terms, your debt-to-income ratio is the percentage of your monthly gross income that goes toward paying all of your debts and liabilities, which includes your mortgage, credit card debt, student loans and other housing expenses. Your DTI ratio is broken down into two parts: front-end ratio and back-end ratio. With a few calculations, you can calculate your own DTI ratio and take steps to improve it.
Your front-end ratio is the percentage of your gross monthly income that goes toward your monthly housing payment. To calculate your front-end DTI ratio, divide your monthly housing payment (principal, interest, insurance, taxes, etc.) by your pre-tax monthly income. As a general guideline, you’ll want your monthly housing payment to be less than 28 percent of your gross monthly income. If it’s higher, that may be a red flag if you’re applying for a mortgage, although there is some flexibility in some cases.
The second part—your back-end ratio—measures your gross monthly income against all of your recurring monthly debts and liabilities and is generally considered the more important component of your overall DTI ratio. To calculate your back-end ratio, divide your total monthly credit card debt, student or personal loans, housing expenses, etc. by your pre-tax monthly income. Under the new Qualified Mortgage rules passed by the Consumer Finance Protection Bureau in 2014, most mortgages require a back-end ratio of 43 percent or less, although some Fannie Mae and Freddie Mac loans do allow for a higher debt-to-income ratio if the applicant has strong credit. Generally, a back-end ratio of 36 percent or less is considered a good goal if you’re looking to get a new mortgage.
If your back-end ratio exceeds the targeted percentage, there are ways to fix it. The most direct way to improve your ratio is to start paying down your recurring debt, such as the monthly balances on your credit cards. Paying down debt is usually much easier and more feasible than taking the reverse route of increasing your monthly income.
If you’re considering buying a home or refinancing in the near future, you’ll need to start working on your DTI ratio as soon as possible.
Even though you may be between jobs (at least technically), these situations are fairly common. If you can understand the situation from the point of view of your lender and know what your options are, you should be able to get the mortgage—and the home—that you want.
Lenders will look at three aspects of your income: history, amount and stability. That may seem like two strikes against you—with only income history going for you—but just because you’re getting a new job doesn’t mean that you’ve suddenly become a lending risk. If your new job is in the same industry and the pay is equal to or greater than that of your prior job, many lenders will consider that as a sort of continuation of your old job. Also, keep in mind that there are other factors—such as your credit score and debt-to-income ratio—that a lender will consider besides income.
In most cases, you’ll have several different options in terms of getting a mortgage when you relocate. A lender may want proof of at least 30 days of employment at your new job, so closing on a new home immediately may be tricky, but there may be ways to get around this. For example, if you have an offer letter—or, better yet, an employment contract—a lender may approve your loan as long as your start date is before the date you close on your new home. If that’s not feasible, most lenders offer loan products that are specifically geared to these situations.
The bottom line is this: Lenders deal with people relocating for a new job on a regular basis and they will certainly do their very best to get you into your new home.
Whether you have been mulling over the idea of buying your first home in California or fifteenth home, it may be a very wise financial decision to finally pull the trigger on buying a new home in California this year.
Here are five reasons why:
1. Having a mortgage loan can be less expensive than paying rent. Rental rates have been climbing and the latest numbers show a 6.1 percent year-over-year increase. In many areas, the average monthly rent is higher than the average monthly mortgage. Or, look at it this way: Making a mortgage payment is an investment into your equity, whereas making a rental payment is not.
2. California Home prices are still reasonable in most areas. As we mentioned, home prices are rising in many areas, but not as fast as they were two years ago or even last year, when prices rose slightly above 4.0 percent nationally. Although all real estate markets are different, prices in many cities and markets are significantly lower than they were at the peak of the housing boom back in 2006.
3. Interest rates are low for all types of mortgages. Whether you’re looking for a 30-year fixed-rate, a 15-year fixed-rate, a jumbo loan, or an adjustable rate mortgage, the interest rates are definitely in your favor right now. Currently, the rates are at the lowest levels they’ve been since May of 2013. Along with home prices, this is an area in which you can save quite a bit of money.
4. Getting a mortgage loan with a down payment of 3 percent just got easier.Although there are some restrictions, you can now get a mortgage backed by Fannie Mae or Freddie Mac that has a down payment requirement as low as 3.0 percent (Fannie began backing such loans in December and Freddie will begin on March 23). You now have two more options to go along with the other low down payment loans.
5. Buying a California home is a good investment—especially as a long-term investment.Real estate is one of the best investments. Yes, the housing market is cyclical and there are plenty of ups and downs, but right now we’re seeing an upswing in many markets and this is a good time to be a buyer. In the long term, real estate is an especially good investment—as long as you’re willing to ride out any declines in prices and values.
It’s important to remember that real estate is always in flux and market conditions can change very quickly—especially home prices and interest rates—so don’t wait to buy if you’re ready.