562 Lynnhaven Pkwy

Virginia Beach, VA 23452

(757) 687-9787

Steven Kirkpatrick
Licensed Mortgage Loan Officer

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Steven Kirkpatrick - Mortgage Loan Originator

Can I Afford to Buy a Home?

It seems that nearly every day we get a call or an email from someone expressing the desire to become a homeowner, but they don’t know if they can afford it. This report will explain an easy way to answer the “affordability question” for aspiring homeowners.
Can I Afford to Buy a Home? Cash to Close

For most home purchases, you will ideally have at least 5% of the purchase price saved up for a down payment.  For example, 5% down on a purchase price of $160,000 is $8,000.  Some loan programs allow for smaller down payments, such as an FHA (Federal Housing Authority) loan, where you can buy a home for as little as 3.5% down. 

There are even some programs that require no down payment at all, such as USDA (U.S. Dept of Agriculture) rural home loans.  That’s right – zero dollars down payment. However, a traditional 20% down payment would result in a better interest rate and a stronger long-term financial solution.

Owning a home requires paying property taxes and homeowner’s insurance. When you buy a home, you will be required to pay up to seven or eight months of property taxes in advance, and about 14 months of homeowner’s insurance in advance. How much of this will be required?

Figure approximately 1.25% to 1.4% of the home purchase price. For a $160,000 home in Newport News, for example, your escrow account might be about $2,100. That’s in addition to your down payment.

These are the charges you incur when you buy a home.  It includes things like Title Insurance, Recording Fees, Transfer Taxes, Loan Origination Fees, Appraisal Fees, etc.  If you hire an attorney (a good idea), you will have to pay for legal services as well.  Depending on the loan program you use, and the amount of your down payment, you may also have to pay additional fees. 

This might include, for example, a “Funding Fee” for VA (Veterans Administration) loans, or an “Up Front Mortgage Insurance Premium” (for FHA loans), an “Upfront Guarantee Fee” (USDA loans) or some other form of a lump sum mortgage insurance fee.  Many of these fees can be added to the cost of the loan, so you don’t need more cash to pay for them at closing.  

Closing costs can vary widely; they can range from below 2.5% to over 5.0% of the loan amount.  For that $160,000 home in Newport News, with a 5% down payment, your closing costs could be (very roughly) in the range of 3.5% to 4.0% of the loan amount.  That would be in the range of about $6,000, give or take.

So, as you can see, it can take a lot more than just the down payment to buy a home.  However, there are some bright spots, so don’t despair just yet.  There is still hope.  For example, you might be able to get the seller to pay some, or even all, of your closing costs.  

Typically, this becomes part of the negotiation process, which is why you need a really good real estate agent representing you as the buyer.  A good agent might convince the seller to pay your closing costs.  Typically this might work if you offer to pay the seller a slightly higher purchase price.

There are also some government sponsored programs that can help you with a down payment – either as a grant (gift) or a “forgivable loan.”  Some of these programs can be quite generous – often 2% or more of your home purchase price.  Ask me for more details.  These programs are almost always limited to “first time” home buyers – which typically means that you have not owned a home in the past three years.

Can I Afford to Buy a Home? - Ability to Repay

Another important factor, however, involves your other monthly payment obligations.  If you have obligations for things like car payments, student loans, credit cards, child support, etc., we will consider these payment obligations as a factor in your ability to repay your mortgage loan.  As a guideline, we like to see your total payment obligations at no more than 36% to 40% of your pre-tax income.  Thus, the more debts you have, the less you can borrow to buy a home (DTI – Debt to Income Ratio).

Let’s go back to our borrower earning $70,000 per year.  If that borrower has more than $500 in monthly payments to creditors (such as car payments, student loans, and credit cards), then they could no longer afford that $1,600 monthly payment.  

The borrowing ability is reduced dollar for dollar for any monthly payments beyond that $500 threshold. So, if they have monthly payment obligations of $900 instead of $500, they could only afford a monthly housing payment of $1,200 per month instead of $1,600 per month.  This might lower their purchasing power for a new home from about $200,000 to somewhere around $170,000.

Don’t despair, there are loans available that allow you to spend up to 45% (or even 50%) of your pretax income on housing costs.  That’s a conversation to have with me.

Another factor to consider is the “quality” of your income.  Ideally, you have been at your job for at least two years, and you are a regular wage earner who receives a Form W-2 every year.  If you have been at your job less than two years, I will need more details about your employment history.

What if you receive a Form 1099 instead of a W-2?  Well, for one thing, it means you are treated as being “self-employed,” and the standards of income verification are tougher.  This is what I mean by “How reliable is your income?”  

It is much easier to get  W-2 wage earners through underwriting over the more entrepreneurial Form 1099 income earner.  Why?  Because it’s not how much money you take in on a Form 1099 that matters – it’s your net taxable income that matters.  

For example, suppose you work as an Uber or Lyft driver and take in gross receipts of $70,000 per year, and you have a Form 1099 to prove it.  Sorry, but we can’t use your gross receipts – only your taxable income as reported to the IRS.

For example, if you drive for Uber and Lyft, you might take in $70,000 in a year, but you are more than likely going to deduct expenses from your income (as permitted by tax laws, of course).  This might include things like gasoline, vehicle maintenance, insurance, mileage deductions, and even your cell phone bill.  

Suppose these costs amount to $25,000 per year.  In that case, your actual earnings (according to both the IRS and any mortgage lender) is $45,000 per year instead of $70,000.  Ouch!

But wait, there’s much more that goes into the underwriting process! If you are a 1099 earner instead of a W-2 earner, the rules to determine your income are a bit tougher.  Generally, we rely on your average net earnings over the past two years as reported on your tax returns as your income.  

Did your income go up or down from last year, or is it about the same?  A drop in income from one year to the next might require us to use your lower net income on your loan application.  

This helps explain what I mean by “Reliable” income.  Is it steady, and is it predictable?  Will it continue into the future?  You get the idea. 

As a 1099 earner, you have yet another challenge.  We are required to calculate your income based on your tax returns in most cases.  This might cause a delay in terms of your timing.  Suppose, for example, your income is going up – you’re having a great year – it’s only August, yet you’ve already earned more in eight months than you did for all of last year.  

That’s great, but we can’t use that income until you have filed your tax return for the current year.  So, even if you file your tax return in January, that’s still five months away from August.

If you are a 1099 earner instead of a W-2 earner, the rules to determine your income are a bit tougher.  Generally, we rely on your average net earnings over the past two years as reported on your tax returns as your income.

Can I Afford to Buy a Home? Cash to Close

Your credit score is very important, and could cost or save you a lot of money. It’s a major factor in determining the interest rate on your loan, and it has a significant impact on the cost of mortgage insurance (MI) for most loans.  If your score is below certain thresholds, you won’t even qualify for some loans.  Indeed, if your score is below 580, we won’t be able to offer you a loan at all until your score is raised.

But, once again, don’t despair if your credit isn’t where it needs to be, we can help! By the way, we love telling people that Fairway is a fantastic, wonderful company! 

We offer an incredible, free service called “CrediTool” that helps you raise your credit score.  You are assigned a personal Credit Analyst – a Fairway employee – who will work one-on-one with you to build a strategy to raise your credit score.  

No other mortgage company in the country does this – only Fairway.  You have no obligations to us, and there is never a cost.  By the way this is NOT “credit repair.” 

In our experience, many so-called “credit repair” companies engage in business practices (including false advertising claims) that are not entirely honest and ethical, and sometimes even fraudulent.  In fact, anything that they do to improve your credit, you can do yourself.  Indeed, according to the U.S. Federal Trade Commission: “Anything a credit repair company can do legally, you can do for yourself at little or no cost.”

Please don’t worry, if you feel confused, intimidated, or overwhelmed about fixing your credit, don’t freak out.  My team and I are here to help.

Our Vision/Core Values

Fairway's core values define who we are and what we strive to accomplish every day. These values guide us in how we work, how we interact with each other, and how to best serve our customers and team members.

Humility First

We are grateful for the opportunities we have and continue to work hard, always striving to BE better and DO better.

Committed to Serve

We are committed to serving our branches and origination teams, allowing them to focus on originating and closing loans.

Family Focused

We are committed to protecting the well-being of our team members and consistently promote a healthy work/life balance.

Create an Amazing Experience for You

From the day a new team member walks through the door, it’s our goal to provide a smooth and seamless transition for you, your team, customers and business partners to ensure an amazing experience.

Speed to Respond

This is the mantra of Fairway’s Support Teams, which continuously sets us apart in the marketplace.

Consistent, Honest Communication

Communication to our team members and management is fully transparent with daily posts being sent to communicate events, trainings, underwriting guideline changes, new programs and more.

Foster Growth & Knowledge

We understand the importance of education and training and provide extensive onboarding support for new team members and deliver access to discounted industry events, further nurturing professional growth.

Have Fun

We enjoy where we work and the people we work with, so we always strive to have fun each and every day.

Respect, Listen & Stay Balanced

We understand the importance of open communication between our originators, also known as “The Street,” and support staff. Major decisions to policies and procedures are always vetted first, before implementation.

Seek Wise Counsel

We value the input and perspective of others so we can make the best decisions possible.

Licensed Home Loan Specialists

Professional Advice from Local Professionals in Your Area

Down Payment

As you can see, the amount of cash you need to save up to buy a house can vary quite a bit. You might be able to buy a house worth $160,000 in Smithfield with no money down using a USDA loan and have the buyer pay your closing costs; in this example all you pay is the escrow funds – roughly $2,000 total is enough to buy that house.

Buying a home of comparable value in Virginia Beach with an FHA loan where you put down 3.5% for the down payment and you pay all of your closing costs might require roughly $13,500 in cash at closing.

The "A" in PITIA

One other thing: keep in mind that if you buy a condo, townhouse, are a house covered by a homeowners' association (HOA), you will have an additional cost for HOA fees, sometimes called “common area” or “maintenance” fees. Any such fees will be factored into your ability to repay and thus will impact your borrowing ability.

Word of Advice for New Homeowners

Finally, don’t forget about ongoing costs of day to day living. All homes require care and maintenance. What happens if your heat pump suddenly dies, your roof starts to leak, or your refrigerator stops working?

A properly maintained house will grow in value over time, but if things fall into disrepair, it can cost you aggravation and financial loss in the long run. It certainly helps to be handy.

Sometimes you can save a small fortune by being your own handyman (or handywoman?). An electrician might charge you $150 to replace a light switch. If you do it yourself, it might cost $5.

Home ownership is a big part of the American Dream.  My team and I at Fairway Mortgage are here to help you achieve that Dream.

Can I Afford to Buy a Home? Mortgage Rates

Monthly Payment

Use our home affordability calculator to estimate the total PITIA (Principal, Interest, Taxes, Insurance and sometimes Association dues) monthly payment. All of which will be reviewed by underwriting as part of your debt to income ratio (DTI), including your monthly income.

Our mortgage rates estimator is also an excellent tool to use when trying to determine what your monthly payment will be - always know the home price and interest rate beforehand to ensure the home buying process is smooth and there are no surprises at closing!

Numbers Speak - Fairway Independent Mortgage Corp.

$ 1
in Total Home Loans Funded (2019)
1 Years
In a Row Voted Best Company to Work For
# 1
2019 FHA Total Loan Volume
# 1
Total Retail Volume in the United States
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