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Buying a house involves a lot more than touring homes and choosing your favorite property. There are several steps to take before ever stepping into an open house. The process is the same for both first-time homebuyers and for purchasers of a second (vacation or investment) property. —whether or not they are self-employed—and will also discuss the tools Ark Mortgage makes available to help you determine the best loan for your specific needs and circumstances.
First things first
Before purchasing any property, you must first determine your budget and your monthly Maximum Affordable Payment (MAP). This tells you exactly how much home you can comfortably afford. Ark can help with this process. We’ll also explain what steps you must follow to qualify for a mortgage, how much of a down payment you’ll need, and how to gather those funds. BTW, there’s a free-to-use budget tool on Ark Homes. It will help you figure your MAP and help you find homes that fit.
Once you have decided upon an affordable purchase price, it’s time to decide on some other priorities. First, location. What’s most important—the caliber of local schools, services, amenities, houses of worship? What size and style of home do you prefer? How much land? Deciding your preferred lot size will require weighing your need for privacy against the time and effort you are prepared to invest in lawn mowing, snow shoveling and gardening. Finally, are you willing to take on some repair work? If so, purchasing a “fixer-upper” may save you some money.
Next, begin to assemble your Home Purchase Team. Aside from a mortgage services lender, you’ll need a Buyer’s Agent (who works specifically for you and not the seller), an attorney who specializes in real estate transactions, and a residential home inspector.
Only after you have determined your MAP, analyzed your budget, figured out the source of your down payment, established your priorities and assembled your team should you start exploring the local home inventory. Armed with the best professionals, you’ll be in the strongest position to move forward and find your dream home.
One of the first questions first-time homebuyers ask is, do I earn enough to afford a home? The answer depends on three things—your total income, the sales price of the home (plus monthly tax and homeowner’s insurance) and the amount of your current debt. Lenders use this information to determine your Debt-to-Income Ratio or DTI. It works like this:
Buying Your First Home
To determine your DTI, your lender first needs to review your income, which includes your monthly gross salary as well as alimony, child support and rental income, if you choose to use that information. Then they look at debt. Debt includes credit card and other revolving credit payments, student loans, car loans (if 10 payments or more are still due) and any other outstanding loans.
Mortgage lending companies determine your DTI by adding up all your monthly expenditures (including your proposed housing costs—mortgage payment, interest, property taxes and insurance, or PITI), and then dividing that combined figure by your gross monthly income. The maximum acceptable DTI can vary by mortgage lender and loan program, but it generally ranges between 40-50%. Ideally, your PITI will account for no more than 36% of your total monthly income, and your PITI plus other monthly debt payments combined will equal no more than 43%.
A verbal disclosure of income, assets and debt may be all a lender needs to provide you with a pre-qualification letter that sellers may need to see before considering your offer to buy their home. However, an Ark Certified Pre-Approval may carry more weight since it tells sellers that Ark has actually seen, reviewed and verified most documentation necessary to underwrite the loan.
To provide you with a Certified Pre-Approval, your Ark Personal Mortgage Advisor must verify the information you provide verbally. This will likely entail:
- Permission to run your credit report. A credit report will show all open lines of credit, how much you currently owe, and your payment history. Your creditworthiness will be summarized by a FICO score. Generally, to qualify for a mortgage, your FICO score should be at least 620, though FHA loans may accept a score of 500 or higher. Your credit report should reflect a solid credit history with no recent bankruptcies or lapses in payment. It’s advisable to utilize 30% or less of your total credit (all credit cards combined.) If you don’t have any credit history, you may ask immediate family or friends to add you onto their credit cards as an approved borrower.
- Recent pay stubs as well as two years-worth of verifiable income (W2 forms). Proof of alimony, child support, rental income, and income from 401K plans and IRAs may also be included if you choose. If you are a self-employed borrower, or a borrower with multiple streams of income, your Ark Personal Mortgage Advisor will advise you about what other documentation may be necessary. We’ve specialized in loans for self-employed borrowers since 1983.
With a Certified Pre-Approval in hand, you’ll be in a stronger position to go out with your Buyer’s agent and make an offer.
Buying Your Second Home, Part One: Upsizing or Downsizing
Let’s say you’ve gotten over all the hurdles of buying that first home, lived in it for a while and have now decided you want to upsize (move into a larger or more expensive home) or downsize (move into a smaller or less expensive home). Your main concern will likely be timing. How can you be sure you’ll sell the first home in time to have the money in hand to purchase the next one? Alternatively, what happens if you move forward and buy the second home before selling the first? In terms of mortgage lending, how can you be certain you’ll qualify and won’t overextend yourself financially? And if you do sell one and buy the other but the closing dates don’t coincide, where will you live in the meantime?
Luckily, there are several ways to solve these issues.
Many buyers’ mortgage services won’t approve them to own two homes at once. If you must use the proceeds of your current home to pay for your next one, make sure that when your real estate agent lists your home on the Multiple Listing Service, they include an explanation that the sale is contingent upon you finding your next property. This tells potential buyers that you are currently house hunting and may not be able to close right away.
Some buyers might not be in a rush to close and will love the house enough to be willing to work within your time frame. They may be willing to go into contract with a closing date to be determined. This might work especially well if you decide to sell your home in the winter because many relocating families may not want to pull their children out of school mid-term. The benefit for you in securing a buyer early is that when making an offer on your next home, the seller will be more likely to entertain your offer. They won’t be worried that you might not be able to close on your home and afford to buy theirs.
One consideration, however: some potential buyers might have a mortgage rate they want to lock in and may have to close by a certain date. You may have to be a little more flexible in your sales price to compensate them if their rate increases while they are waiting for you to find your next home. If they are working with Ark Mortgage for their mortgage services and have secured an Ark Certified Pre-Approval with Rate Protection, this might be less of an issue because their rate may be locked in for 90 days. Have them contact Ark for more information.
Have your attorney insert a “sale contingency” in the contract for your next home. This means you agree to buy the home only if you can sell the one you currently own. Be forewarned: sellers won’t always accept this contingency because they run the run the risk of your current property not selling. Meanwhile, they could have lost other potential buyers because their home was “off the market” waiting for yours to close.
Finally, your attorney can also arrange for a “use in occupancy” agreement as part of the contract for the sale of your current home. This would alert potential purchasers that you reserve the right to remain in the home and pay them per diem rent to cover their cost of ownership (which might be higher than what you used to pay for mortgage/tax/fees) until you find your next perfect property. Normally, you would be required to escrow a security payment as well, just as in a rental agreement.
Knowing your options means that buying a new home while simultaneously selling your current home won’t be as complicated as you might have initially believed.
Buying Your Second Home, Part Two: Investing in a Rental or Vacation Home
Home owners who purchase a second property do so for numerous reasons. Some want a vacation home that they rent out during the periods they’re living elsewhere. Others may buy an investment property to rent out full time. A second house might be a place to eventually retire but can be rented out until its owners retire. Some generous parents might buy a home for a child. Finally, some people may end up owning a second home (at least for a time) because they need to move by a certain date and cannot complete the sale of their first house by that date.
Here are some things to consider before purchasing a second home:
Are you a good candidate to be a second home owner? Again, your Debt-to-Income Ratio or DTI will come into play but now the PITI expenses of that new home will be included. If you do plan to rent out the property, speak to your mortgage banking firmabout how the anticipated rental income can positively affect the calculation of your DTI.
Have you considered the cost of maintaining two properties? This includes immediate or eventual renovations such as roof and appliance replacements and painting. Will the second property involve new or additional fees (pool maintenance, flood insurance, homeowners’ association fees)? Also, consider the cost of a property management company to monitor and maintain the condition of the home in your absence, such as ongoing landscaping, snow removal, and checking for water leaks or frozen pipes in the winter.
Do you have a down payment (typically 10%-30%) that will still leave you cash to spend on any desired renovations plus an emergency fund in case of job loss or illness? You may consider refinancing your primary home to access any built-up equity to finance the down payment of the secondary property. Underwriters with mortgage lending companies typically want you to have a cash reserve buffer equal to six months of payments covering both properties before approving your loan. Why? Investment properties can be experience gaps in occupancy and are susceptible to tenant-inflicted damage. Regardless, the owner will still have to pay mortgage and taxes. Also, be aware that second homes may be subject to higher mortgage interest rates than primary residences. While this may affect you short-term, it may pay off in the long run at resale – if and when the property appreciates in value.
It is critical that you obtain the advice of a tax advisor about the tax implications of purchasing, owning and reselling a second home, especially considering new legislation that can affect deductibility and capital gains.
Before buying a vacation home, you should decide if you might get bored of a location after a few years. Would a vacation rental be better suited to your needs?
If funds are tight, would you consider co-ownership of a vacation home with other family members or friends? If so, consult an attorney to set ground rules.
Choose the property carefully. If you decide later that you don’t want a second home, you’ll want to make sure the home is easy to rent out or resell.
Finally, if you are planning to rent out the home as an investment property, consider if you have the temperament to be a landlord. You should be reliable and resourceful (you’ll be responsible for maintenance and repairs), have good business sense, and excellent people skills—including tact and patience when dealing with tenant complaints.
Spotlight on Self-Employed Borrowers
Real estate buyers and investors work hard turning their vision into reality. They shouldn’t have to work even harder to qualify for a mortgage just because they’re self-employed. Yet many mortgage lending companies won’t take the time or have the expertise to verify documentation reflecting multiple streams of income.
If you’re a self-employed borrower, you’ve come to the right place. We’ve innovated new programs and processes to get ‘diversified’ earners and entrepreneurs qualified and closed, faster and easier, without endless requests for additional documents. We’ve checked all the boxes, so you’ll have more time to capitalize on new opportunities:
The expertise and experience to qualify an entrepreneur’s complicated income.
Competitive rates for long-term and short-term investment opportunities.
Our Cash Advantage Program (CAP) which offers 100% cash out on qualifying investments with high equity, for improved cash flow and reinvestment opportunities.
Peace of mind, thanks to the Lifetime Guarantee that permits refinance with waived/reimbursed fees.
Multiple Property Discounts, which allow you to refinance several properties simultaneously but pay only one application and commitment fee.
Ark Tools and Services for Home Buyers
What’s the right mortgage or refinancing option for you? It’s a very personal decision that should be discussed with your Ark Personal Mortgage Advisor. Many potential borrowers come to Ark asking only about rate. But any mortgage advisor who offers you a rate without asking specific questions about your assets, liabilities, income and specific financial goals may be doing you a disservice. The rate is ultimately linked to your personal economic situation, so no one knows what the rate will be until you complete an application. It’s also important to remember that selecting a mortgage involves more than just considering the rate.
Specifically, determining the “best” mortgage is predicated by five factors:
Yes, this is based on rate and Ark is highly competitive. But payment should also be based on what monthly payment is best for you.
Your down payment should leave sufficient funds for home improvements as well as several month’s reserve as financial protection against job loss or illness.
The length of your loan should be based on when you wish to become mortgage debt-free. Shorter terms may have a higher payment but can save $ tens of thousands over the life of the loan.
Your down payment amount, interest rate and monthly payment amount can all have an impact on your taxes. These are best discussed with your CPA to optimize your results.
Real estate is an investment in your future. Your Ark Personal Mortgage Advisor will structure a loan designed to maximize your potential ROI.
The Next Step
Ark Mortgage is the smart choice for first-time homebuyers, those looking for a vacation or investment property and for self-employed borrowers. For more than thirty-five years, we’ve helped borrowers in New York and New Jersey with expert financing and refinancing. Start the process by clicking below and we’ll hook you up with a Personal Mortgage Advisor right away.