When you are "pre-approved" by a lender we get excited and think it's go time, right?
Wrong! There are some details that one must know in addition to being preapproved, prior to requesting to go out and tour homes.
One of the mantras I share with buyers is just because the bank pre-approves you for an amount, doesn't mean you should spend the entire maximum amount. You have to spend your comfort zone amount.
How would one determine their comfort zone? you may ask...
Focus your attention on the monthly mortgage payment... which includes the P.I.T.I. M.I. (Pity Me) That's Principal, Interest, Taxes, Insurance, and Mortgage Insurance.
The Break Down:
Principal - the direct loan amount
Interest - the amount the bank is charging you to loan you the money
Taxes - your annual property taxes amount (divided by 12...for each month)
Insurance - your monthly home owner's insurance amount
Mortgage Insurance - Insurance that protects the bank in the event you default (stop making payments)
This is one of the reasons why I like to see a mortgage estimate broken down in addition to your pre-approval letter. A mortgage estimate breakdown is critical because it gives you 3 numbers that help you determine whether or not you can afford to buy a home.
The 3 numbers include your down payment amount, and your Cash-to-close or closing costs amount, which is the amount you're required to bring to the table. Finally, your monthly mortgage payment that includes your entire PITI MI.
As buyers, beware as some software and lenders will give you your monthly mortgage payment that only includes the principal and interest. Be sure to ask for clarity that the monthly payment amount that you are quoted includes the taxes, insurance, and mortgage insurance.
So, once pre-approved, you want to let your lender know your maximum comfortable monthly payment amount.
Let's Talk POC (Paid Outside of Closing) or Out of Pocket Expenses: Out of pocket expenses are expenses that will require cash, check, money order, wire, or cashier's check (i.e. bank check) for items that will need to be paid before closing. Your out-of-pocket expenses include your earnest money deposit, home inspection(s) costs, appraisal*, and first year of homeowners insurance policy paid in full to start your escrow account with your lender.
*Please note, that the appraisal cost is the only one of these that are listed in your loan estimate breakdown from your lender. The rest are costs that are in addition to your cash-to-close amount.
Once you know your maximum purchase price amount (in a specific area) now, it's okay to start touring homes.
Why am I writing this blog? because I've seen too many buyers hear approved and are ready to run out of the door and don't know or understand the details of their numbers...i.e. if they can comfortably afford the homes that they want to see.
Do your due diligence at the gate, so that we are not wasting time or gas seeing homes that you cannot comfortably afford.
Overall takeaway: You should know, have, and/or have completed the following before touring homes:
- Your maximum comfort purchase price
- How much is your total monthly payment (including your entire PITI MI)
- How much is expected for your earnest money deposit
- What type of financing you will be using
- What grants and/or incentives for which you are qualified and will be using
- Completed one-on-one in order to qualify for your grants and/or incentives
- A ballpark figure of the cost for a home inspection
- What's the soonest your lender can close
- How much your appraisal will cost
- How much one year of home owner's insurance will cost
Tomeka Givens, Realtor®
ExecuHome Realty
443-845-1137
tomekagivensrealestate@gmail.om
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