Buying a New Home
Your Guide to Buying a New Home in Las Vegas
The first step in buying a new home is figuring out how much you can afford to spend. Most people will have to borrow money in the form of a mortgage, so you’ll need to see what kind of mortgage you are eligible for, through a process known as pre-qualification.
What is A Pre-Qualification?
Qualifying for a loan is the heart of the mortgage process and the first step of buying a new home. This is where the lender decides how much loan you’re capable of repaying, and therefore how much you can spend on a house.
Taking out a mortgage is probably the biggest obstacle facing prospective homeowners. The bank may not want to lend you as much as you need. This is a big problem for you, but there’s a reason for it. Put yourself in the bank’s shoes: If you were going to lend people money, what would you want to know about them? Basically, you’d like to know 1) if they make enough money to pay you back, 2) if they’ve been trustworthy in the past, and 3) if they have something of value should they be unable to pay you back.
In financial vernacular, you’ve just been introduced to the concepts of income, credit worthiness, and collateral. Let’s look at each one.
Do You Make Enough to Pay the Lender Back?
Your lender will want to know not only how much money you have, but how much you will likely make over the next 30 years. Also, what are your other debts? Do you owe money for college or on credit cards? Do you have any other assets? Things like stocks and mutual funds or real property like a boat or a car are also considered in figuring out how much a bank will lend you.
In general, the lender will want you to come up with at least 20% of the value of your new home for a down payment before they will give you a mortgage. However, there are special financing arrangements that will get you into a new home for as little as 3.5% of the asking price.
The lender will also plug your income numbers into a couple of formulas: the front-end ratio (having to do with your mortgage payments) and the back-end ratio (having to do with your debt).
Let’s say your gross income is $4,000 a month, and you have $1,000 a month in debt payments. The rule of thumb is that they’ll allow you to pay 29% of your gross income toward your mortgage payment every month. This is known as the front-end ratio. In this example, 29% of $4,000 is just under $1,200 a month — so, they’ll reason, you can put $1,200 toward your mortgage payment.
Your debt ratio or back-end ratio, on the other hand, is 1,000/4,000, or 25%. That’s not bad. They don’t want more than 41% going to your other debt. (These ratios can vary somewhat; the ones given here are good examples).
Have You Been Trustworthy in the Past?
What is your credit rating? The three major credit reporting agencies are Experian (formerly TRW), Equifax, and Trans Union. For about $8 each (less in some states) you can order reports directly from their websites. These reports will indicate whether you have a couple years’ history of paying your bills on time.
If not, there are ways to clean up your credit record that will make you more attractive to lenders.
Do You Have Something to Use as Collateral?
In case you can’t repay the loan, the bank can foreclose on the mortgage and repossess the house. That means they own it, and you no longer do. Your house now belongs to the bank, and it is unlikely that anyone will ever loan you money again. Obviously you will want to avoid this scenario at all costs.
The above three considerations are from the bank’s point of view. Now, let’s take a look at a few things from your point of view.