Buying a House – First 3 Steps

Dan Standeven asked:

Before buying that first or next home, there are 3 things you should really do before calling your real estate agent or mortgage broker. It is important to understand where you are financially before your heart becomes set on that perfect house. By figuring out your net worth, your monthly budget, how much debt you pay every month and what your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios are you will have a better understanding on how much you can afford on that new house.

1) Net Worth

Simply stated your net worth is the difference between your Assets what you own and your Liabilities, what you owe. It is important to analyze your net worth prior to jumping into the house buying market. One it gives you an accurate look at your current financial situation, and two when it is time to talk to your mortgage broker or lender you will already know the answers to their questions. It is better to be aware of your financial information prior to this meeting so the feedback you receive will not come as a complete surprise. Knowing your net worth will give you a good indication of how much of a down payment you will be able to afford.

2) Budget and Debt Payments

If you haven’t done so prior to buying your house, you should at least create a list or budget of your monthly finances and debt payments. It is good to know how much of a mortgage payment you can realistically afford. A monthly statement of your expenditures and debt payments will give you a breakdown of where your money is being spent. Once you know how much you spend on heat, electricity, cable, groceries, and all those monthly expenses that seem to creep up on us, you can see what kind of mortgage payment will fit comfortably into your budget.

3) GDS & TDS

Almost always lenders will use two methods to determine what you can afford as a monthly mortgage payment. The GDS determines the monthly housing costs as a percentage of your total gross monthly income. Your total housing cost payments can not exceed 32% of your gross monthly income. These costs usually include principal and interest of a mortgage, taxes, and heating expenses. For example if you paid $1000 monthly mortgage payment (Principal & Interest), with $100 for taxes, and $100 for heat, you pay $1200 total monthly housing cost. If you make $5000 a month in gross income your GDS would be $1200/$5000 = 24%. The TDS is an expansion of the GDS, along with monthly housing cost payments all other debts such as loans and credit cards are also considered. In this case your TDS can not exceed 40% of your monthly gross income. Taking our last example if we add $500 a month in other debt our TDS would be $1700/$5000 = 34% As you can see there is a lot of pre-work before you decide to hit the pavement. It is always a good idea to sit back take an hour or two and figure out where you are financially before talking to that mortgage broker or real estate agent. It may save a lot of people, a lot of time or you maybe very happy to learn you can afford more than you expected.

Scottsdale Real Estate Market

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