There is a lot to do to buy a new home, from finding the right one to completing the paperwork. Somewhere in the process, you will likely be trying to figure out tons of new terms and what they mean to you.
We have compiled this list of seven key numbers you need to know when buying a home. It will also teach you how to find your dream home by understanding these terms.
Here are seven important home purchase numbers.
1. Cost per square foot
One of the first numbers you come across when shopping for a home is the cost per square foot. While this number is based on a relatively simple calculation, it is important to understand because it will ultimately determine how much home you get for your money.
“The cost per square foot is simply the list price divided by the number of square feet of habitable space,” said Tyler Forte, founder and CEO of Felix Homes. “This number is important because it enables a homeowner to compare the relative price of houses of different sizes.”
But there is more to consider, he said. “While the cost per square foot is an important metric, consider the layout of the house as well. In many cases, an open floor plan home can appear larger, even if it has a smaller habitable area. “
Forte defines livable space as any heated and cooled interior, which is why a garage does not necessarily fit into the bill. One of the best ways to understand how much house you can afford is to break it down by cost per square foot, which varies from city to city and neighborhood to neighborhood.
Work with your property Agent to understand the cost differences for different properties and what areas and houses are within budget.
2. Earnest Money Deposit
Once you’ve found a home you’d like to bid on, you’ll quickly hear about something called an Earnest Money Deposit (EMD). This is a type of deposit made by the buyer to the seller as a gesture of good faith.
The EMD amount is set by the seller and is typically between 1% and 2% of the home purchase price. The most important thing to keep in mind about EMDs is that they represent your commitment to home buying and can be helpful in making a compelling bid in a competitive proposition Seller market.
“A serious cash deposit is very important as this is the homebuyer ‘s skin,” said realtor Jason Gelios of Community Choice Realty. “If a home buyer competes against other offers, the EMD can trick or break them into getting the home.”
“I’ve seen lower bids won due to a higher EMD amount because sellers view the higher EMD as a more serious buyer,” he added.
The money you put into your EMD depends on the purchase price for the house. So there is no reason to be stingy. If you really love the house and have the cash available, you can even consider offering more than the deposit amount requested by your seller. Either way, you should start saving for your EMD early, and incorporate that into any other money you have reserved for your EMD deposit.
3. Interest rates
Since most home purchases involve a mortgage, you should familiarize yourself with the current interest rates. The interest rates determine how much you pay your lender each year to borrow the amount of your mortgage. So you should look for the best deal.
“Your interest rate is the annual percentage charged by the lender. The lower the interest rate you get, the lower your monthly payment,” said real estate developer Bill Samuel of Blue Ladder development. “You should speak to a handful of lenders when you start the process and get a quote from each one.”
While interest rates are mostly based on your creditworthiness (aka) Credit score) and the Type of loan you will getThey still vary between lenders. Even half a point difference in interest rates can make a huge difference in your monthly mortgage payment – as well as the total amount you pay for your home.
4. Credit Score
When it comes to credit scores, it is a good idea to get to know yours before you seriously consider buying a home. Since your creditworthiness helps determine the type of mortgage (and mortgage rate) you qualify for, you need to meet the basic requirements Minimum creditworthiness requirements before diving headlong into buying a home.
Forte has broken down the term a little further: “A credit score is the numerical grade that a rating agency assigns you,” he says. “This grade is commonly referred to as the FICO score and is made up of many factors, such as credit use and the length of your credit history.”
If your credit score is low (below 600), take some time to figure out why and how to increase it. Remember, the better your credit, the better your interest rate – and the more money you will save in the long run.
5. Debt to Income Ratio
Another personal finance term that comes into play when buying a home is is Your Debt-Income Ratio (DTI). Similar to creditworthiness, this number is used by lenders to determine how much of a loan you qualify for what interest rate.
“If a buyer wants to get approval for a mortgage, they should know what their debt-to-income ratio is,” Gelios said. “This is the amount of debt you owe per month compared to your gross monthly income.”
For example, if you make $ 6,000 a month but have to pay $ 3,000 in bills, that’s a debt to income ratio of 50%. According to Gelios, lenders tend to view a DTI above 40% as high risk for good reason. If more than half of your income is booked into bills, it would be significantly more difficult to make one large mortgage payment each month.
Understanding your DTI is not only good for lenders, but it also helps put your personal finances into perspective when making a decision How Much House Can You Afford?.
6. Down payment
The All-important Down Payment: Many homebuyers use this number to determine when they are actually “ready” to buy a home based on how much down payment they have saved.
“A deposit is the amount of cash that you contribute to the transaction,” said Forte. “Most home purchases are a combination of cash in the form of a down payment and a loan from a mortgage company.”
The old rule of thumb for home purchases was to cut 20%. If that sounds like a lot of money, it is. (Home price $ 250,000, time 20% = $ 50,000. Ouch.) For many buyers, a 20% down payment is simply not possible – and that’s fine. According to Forte, the down payment with a traditional loan can only be 3% of the selling price, although 10% is more typical.
Remember, whatever amount you prepay will ultimately save you money on interest on your mortgage – and as you put more money down, your monthly payment will decrease. Take some time to calculate what your monthly mortgage payment will be based on various down payments. This way you know exactly what to expect and how much of a deposit You should aim to save.
Note that if the deposit is less than 20%, payment may be required private mortgage insurance (PMI), another expense that will add to your monthly payment.
7. Property taxes and other expenses
Long before you close a home, you need to be ready for ongoing expenses such as property taxes, homeowner insurance, and potential HOA fees. These issues tend to slip the cracks, but it’s important to understand them before you become a homeowner.
“One of the most overlooked and underestimated numbers when buyers actually find a home and win an offer for it is the tax amount,” Gelios said. “Too many times I’ve seen real estate agents listing what the seller is paying in taxes at the time. When time permits, a home buyer should contact the local authority and request a rough estimate of tax when they buy the home has closed in X months. “
Since taxes almost always go up when homes change hands, it’s good to get an updated quote before these payments are your responsibility.
This article originally appeared on www.thepennyhoarder.com