The purchase of a new home can be a stressful and lengthy process, even for those of us who have experienced it multiple times. But with those experiences comes a great amount of knowledge that can be imparted on our grown children who might be looking to buy a house or condo for the first time. If your adult child is at this phase of their life, here are some useful tips from the Sklar Team that will make the purchase flow more smoothly.
Help them become familiar with their credit worthiness
There is so much more than just the credit score that makes a potential home buyer credit worthy. As you are probably already aware, a lender also relies heavily on a person’s income-to-debt ratio. Explain to your child that a lender wants to be sure that the amount of all combined debt payments need to be under a certain percentage of the applicant’s gross income. For most conventional loans, this number should be at 45% or lower, though some lenders will take into consideration certain circumstances that would lead to approval of it being as high as 50%.
There are multiple ways for your child to retrieve their credit score online. Certain companies will give them access to not only their score, but also to the entirety of their credit report from all three major credit bureaus. If their score is high enough to attract a lender, great! Help them to understand what their debt load currently is, as well as what it will look like with a mortgage payment. Once you have their income-to-debt ratio calculated, it will be easy to figure out how large of a mortgage payment they could afford and still stay under that 45% sweet spot.
Emphasize the importance of a budget
Along with utility bills, your child will need to factor other needs and wants into their budget. Encourage them to track their weekly spending so they will know just how much they spend on entertainment, groceries, clothing, and trips to the coffee shop. If they are looking for a townhome or condo like Las Olas Condos, they’ll also need to know that they should factor in dues and fees in their budget.
Without the financial burden of paying a mortgage, these various forms of spending might not have seemed like a big deal to them before. But put into proper context, they should be able to see that cutting their discretionary spending substantially can determine whether or not they’ll live comfortably within their means with a mortgage.
Demonstrate the need to save for a down payment
Use a mortgage calculator to show how much a down payment will impact the monthly mortgage amount. Play with the down payment amounts so that they will understand that the bigger the down payment, the less they’ll need to pay each month.
If they aren’t in a hurry to buy, it might be a good idea to encourage them to save the money to get a 20% down payment. While this is a significant chunk of cash to have to set aside, it saves a homeowner a good deal of money in the long run. Along with a substantially lower monthly principal and interest payment, there will be substantial savings by not having to pay PMI on the loan.
Have them make a list of needs and wants
Refer them to a reputable realtor
*Header photo courtesy of the Sklar Team