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Buying a house? Here's how to increase your purchase power

When it comes to buying a house, it's not just about how much money you make, but also how much debt you have.

Here are tips to get the home

So, you're thinking about buying a house? Before you jump into anything, you need to consider some important factors. One of the most crucial things to think about is how much money you have available for the purchase. This is what's known as your "buying power" or “purchasing power” and it depends on various factors like your income, expenses, and financial obligations.

But don't worry, if you think you may not have that strong of a buying power, there are some things you can do to help you make your dream of owning a house a reality.

Improve your credit score

Your credit score is one of the most critical factors that affect your purchasing power when buying property. A higher credit score can increase the amount of money you're able to borrow and can also help you secure better interest rates. To improve your credit score, make sure you pay your bills on time, keep your credit card balances low, and avoid applying for new credit unless necessary.

It's also important to understand that the length and diversity of your credit history can significantly affect your purchasing power. The longer you've maintained a clean credit history, the more reliable you appear to lenders. This often translates to higher borrowing capacity, more favorable interest rates, and potentially better terms.

Building diverse types of credit, such as credit cards, car loans, or student loans, can further improve your credit score. This demonstrates to lenders that you can handle various types of credit responsibly. However, it's crucial to remember that this should be done prudently; acquiring new debt should never compromise your ability to repay existing ones.

Save for a larger down payment

A larger down payment can increase your purchasing power when buying a house. A down payment is the amount of money you put down upfront when purchasing a home, and it can vary depending on the type of mortgage you're applying for. The more money you have saved for a down payment, the less you'll need to borrow, which can lower your monthly mortgage payments and overall interest costs.

Start by setting a clear savings goal. Determine the cost range of the house you intend to buy and aim to save 20% of that value for the down payment. This percentage is generally recommended because it allows you to avoid private mortgage insurance (PMI), an extra cost that lenders typically require if your down payment is less than 20% of the home price.

Next, consider automating your savings. Set up an automatic transfer from your checking to your savings account each time you receive a paycheck. This "pay yourself first" method ensures that you're consistently contributing towards your down payment, and reduces the temptation to spend that money on other things.

You should also review your budget and look for areas where you can cut back. Small changes like eating out less, canceling unnecessary subscriptions, or choosing cheaper alternatives can free up significant amounts of money over time. Redirect these savings towards your down payment fund.

Another strategy to increase your down payment is to explore first-time homebuyer programs, if you qualify. Many federal, state, and local governments offer programs that can help you with your down payment, often in the form of low-interest loans or grants.

Lastly, consider investing your savings to potentially grow them faster. A balanced portfolio of low-cost index funds can offer a return on your money, but remember that all investments come with risks. Be sure to consult with a financial advisor to make sure that this strategy aligns with your overall financial plan and risk tolerance.

By adopting these strategies, you can significantly boost your down payment savings, thereby increasing your purchasing power and bringing you one step closer to owning your dream home.

Keep your debt ratios low 

When it comes to buying a house, it's not just about how much money you make, but also how much debt you have. That's where the Total Debt Service (TDS) and Gross Debt Service (GDS) ratios come in. These ratios help determine how much of your income is being used to pay off debts, including mortgage payments, property taxes, and other expenses related to homeownership. By keeping your ratios under 44% and 39%, respectively, you’ll have a better chance at getting approved for a mortgage and getting a better rate. 

Firstly, take steps to reduce your existing debt. This could mean making more than the minimum monthly payments on your credit cards, student loans, or car loans. Keep in mind that while it might be tempting to put all your extra money towards your down payment, paying down high-interest debt will help improve your debt ratios and your credit score. It also reduces your monthly obligations, freeing up more income for the costs of homeownership.

Next, be cautious about taking on new debt. Before applying for a mortgage, avoid making large purchases that you'll need to finance, such as a new car or high-ticket electronics. These can significantly increase your debt ratios, potentially pushing them over the recommended limits and reducing your purchasing power. Even after you've been approved for a mortgage, be careful not to take on new debt until the home purchase is finalized, as lenders may reassess your credit just before closing.

Another essential aspect of managing your debt ratios is increasing your income. This could mean negotiating a raise, taking on additional hours at work, or even getting a second job. Any extra income you earn can help lower your debt ratios by increasing the denominator of these fractions. Just make sure any additional work is sustainable and doesn't jeopardize your current employment.

Finally, be aware of all the costs associated with homeownership when calculating your TDS and GDS ratios. This includes not just the mortgage payments and property taxes, but also homeowners' insurance, utilities, maintenance, and potentially homeowners' association fees. Overlooking these can lead to an underestimation of your actual debt ratios and may make it harder to stay within the recommended limits.

By actively managing your debt and income, you can maintain your debt ratios within the desired range, increasing your chances of securing a mortgage with favorable terms and buying the home you desire.

Shop around for the best mortgage rates

Different lenders offer different mortgage rates, so it's essential to shop around and compare rates to find the best deal. A lower interest rate can help you save money over the life of your mortgage, increasing your purchasing power. You can also consider working with a mortgage agent at Pine who can help you compare rates and find the best loan options for your specific financial situation.

Consider getting a guarantor or co-borrower

Another option to consider is getting a guarantor or co-borrower to support your mortgage application. A guarantor is someone who promises to make the mortgage payments if you are unable to do so, whereas a co-borrower is a joint borrower who shares the financial responsibility with you. Both options can increase your chances of getting approved for a mortgage and help you qualify for a larger loan amount. However, it's essential to choose someone who has a good credit score and stable income, as their financial history will also be taken into consideration by lenders. If you're considering either of these options, it's important to have an open and honest conversation with your potential guarantor or co-borrower and seek legal advice to ensure that everyone understands their obligations and rights.

For a guarantor, if you default on your loan, they are legally obligated to cover the payments, which can put their own financial stability at risk. Similarly, co-borrowers are equally responsible for repaying the loan, and any late or missed payments can affect their credit score as well as yours.

In the case of co-borrowers, remember that all parties involved will jointly own the property. This could potentially complicate matters if one party wants to sell the house or if the relationship between the parties breaks down. Therefore, it's a good idea to have a legal agreement in place that outlines each party's rights and responsibilities, including what will happen if one party wants to sell or if one party cannot contribute to the mortgage payments.

As well as this, keep in mind that this is not just a one-time agreement. The mortgage may last for many years, and circumstances may change. Health, job security, and personal relationships can all fluctuate over time. Therefore, it's important to review the agreement periodically and make any necessary adjustments.

Choosing a guarantor or co-borrower also requires careful thought from a relationship standpoint. While parents, siblings, or close friends might be willing to help, mixing finances and personal relationships can potentially strain ties if things go awry.

Finally, explore alternatives before deciding to go down this route. This could include saving for a larger down payment, improving your credit score, or choosing a more affordable property. Using a guarantor or co-borrower should not be your first option but rather a last resort when other avenues have been explored.

By taking these factors into consideration, you can make an informed decision about whether using a guarantor or co-borrower is the right strategy for increasing your purchasing power when buying a home.

Look for homes with hidden opportunities

Not every seller makes cosmetic modifications or even cleans the space well before trying to sell a home. Without visual appeal, these homes may not generate the same interest or buyer competition as better-maintained or recently updated homes, and may sell for a lower price. This gives you more leverage to negotiate a lower purchase price and get the best bang for your buck. If you choose to upgrade the home later with key renovations, you could later sell for a much higher return.

Find a motivated seller

Some sellers need to sell quickly for a variety of reasons. They might be closing soon on a new home, relocating, or running out of funds to afford their home. Regardless of the reason, motivated sellers may be more open to negotiating the price to sell the home quickly giving you the upper hand.

Consider multi-family or multi-unit homes

With a multi-family home, you can live in one unit, then rent the additional unit or units, to tenants for income that can be applied to your monthly mortgage payment. Any repairs or new installations you make to your rental unit may also be tax deductible offering you additional income for your mortgage.

At the end of the day, increasing your purchasing power when buying a home is possible if you plan ahead. By improving your credit score, saving for a larger down payment, lowering your debt ratios, shopping around for the best mortgage rates, and looking for optimal buying opportunities you can save thousands of dollars and bolster your purchasing power.

And if you're ready to get started on your home buying journey, connect with one of Pine's mortgage agents and we'll be happy to work with you to secure the best options for your finances and future

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