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Things to consider when buying a first home in Seattle

By Kevin Wolff, SeattlePI

|Updated
(FILES) In this file photo taken on November 21, 2020 A real estate sign is seen in front of a house for sale in West Los Angeles. - The US housing market boomed in 2020 even as the coronavirus pandemic caused one of the worst economic contractions of modern times, as Americans took advantage of low borrowing rates to buy homes. The surge in new and existing home sales, and home construction, underscores the unequal experience of the pandemic across the United States. Even as tens of millions of people lost their jobs due to the pandemic disruptions, others were able to afford major property purchases. (Photo by Chris DELMAS / AFP) (Photo by CHRIS DELMAS/AFP via Getty Images)
(FILES) In this file photo taken on November 21, 2020 A real estate sign is seen in front of a house for sale in West Los Angeles. - The US housing market boomed in 2020 even as the coronavirus pandemic caused one of the worst economic contractions of modern times, as Americans took advantage of low borrowing rates to buy homes. The surge in new and existing home sales, and home construction, underscores the unequal experience of the pandemic across the United States. Even as tens of millions of people lost their jobs due to the pandemic disruptions, others were able to afford major property purchases. (Photo by Chris DELMAS / AFP) (Photo by CHRIS DELMAS/AFP via Getty Images)Chris Delmas/AFP via Getty Images

One of the most exciting times in life is purchasing your first home. This time can also usher in confusion and stress. What do you need to do to buy a home? How do you buy a home? How much money do you need for a home in Seattle? These are just a few of the big questions surrounding this time. As with most significant decisions, the more homework you do upfront, the less stress you will experience through the process.

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The first recommended area to consider is saving towards a down payment. For some, this can be challenging without a firm target. Some people are motivated by specific goals. Just saying “I want to save for a down payment” may not work. In this case, you may want to jump ahead and figure out when you plan to buy and calculate what you can afford by using projected future income. With this, you can calculate a fixed downpayment savings target. Regardless of how you are motivated, buying a home requires savings for the down payment, closing costs, and moving expenses.

Since you are a first time home buyer, there can be some programs available to aid you in this purchase. Taking potential incentives into account, along with endless choices of loan types from conventional home mortgages with three to 20% down, FHA with a 3.5% down, or some USDA or VA loans with zero% down, the amount you will need to save for a down payment can be all over the place. Typically, you can count on at least two% for closing costs plus your down payment and moving costs.

So, how do you figure out how much money you will need for a downpayment? I find the most straightforward answer is to figure out how much loan you can afford. Once you have this answer, you can also determine the total cost of the home you can afford.

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If you are about to buy or are saving for a down payment, write down the total annual household income you currently have or anticipate having before taxes. With this figure, you can determine your debt-to-income ratio. There are two parts to this calculation. The first is the housing debt-to-income ratio the second is the total debt-to-income ratio.

The ideal monthly housing-related debt-to-income ratio is 28% or below. To calculate this, take your monthly pre-tax income and multiply it by 28%. The goal is a total of the monthly mortgage payment, property taxes, home insurance, and any applicable home association or condominium maintenance fees to be below this amount. For example, if your total household income is 85,000 annually, your monthly income is $7,083. Take $7,083 and multiply by .28, and you arrive at an ideal maximum total housing cost of $1,983. A quick note about property taxes and insurance: these have annual amounts that will need to be divided by 12 to arrive at the monthly value.

To calculate your total debt-to-income ratio, total your total housing costs, student loans, auto loans, and other personal credit. The ideal total debt-to-income ratio is 36% or below. With our example, your full monthly payments should be below $7,083 multiplied by .36, or $2,550. Since these two calculations are interrelated, the most critical of these two is the total debt-to-income calculation.

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Continuing with this potential scenario, let say you are interested in a single-family home or condominium that sells for $400,000. Under these conditions, let’s assume you are putting 20% down, and your loan rate is three%. The monthly payment would be approximately $1,350 monthly payment. Subtracting this from $1,983 leaves a total of $623 to be applied towards property taxes and insurance costs, plus any monthly home association fees.

In King County, a $400,000 home has an annual tax rate of approximately $3,720. For home insurance, an estimate of $450 will work for this example. The total of these two is $4,170. Divide $4,170 by 12, and you have a monthly calculation of $348. The sum of $1,350 plus $348 of $1,698.

There are a couple of other significant monthly housing expenses that may be applicable. They include the mentioned monthly home owner’s association or building maintenance fees and private mortgage insurance. Private mortgage insurance (PMI) applies to home loans with a less than 20% down payment. There are no association fees for our current example, and with a 20% down, no PMI.

The next homework area is making sure you have a strong credit score. When preparing to buy a home, it is necessary to pay off as much personal credit as possible and not purchase any significant items during the buying process. Remember, you want to keep your total debt-to-income ratio below 36%. As it turns out, this will help you maintain a high credit score as well. The goal is to achieve a credit score of 740 or higher. Today, many credit card companies and banks offer this credit score tracking for free. While saving for your down payment, try to maintain a score of 740 or higher. Doing this will help ensure you can get the best mortgage loan terms.

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With much of your homework completed, you are ready to start the process of buying a home. The first step at this point is getting a couple of professionals on your team. The first is a qualified real estate broker. Find someone you trust and who appears to understand your specific wants and needs. The best place to start searching for a great broker is by asking good friends who have recently purchased a home. Ask them for a recommendation. Their experience will tell you a lot.

The second person to search out is a mortgage broker. Your real estate broker may be able to recommend a couple of different people. Getting a good mortgage broker is a critical step in the process of buying a home. Now is when your homework pays off. When you start your search for a home, get a pre-approval letter from your mortgage broker. Note that a pre-approval differs from the pre-qualified letter you may be able to get from a website. The pre-approval letter requires verification of your information, including employment, credit scores, and, lastly, your debt-to-income ratio. You will need this when submitting an offer to buy your new home.

With your homework behind you, a pre-approval letter in hand, and a real estate broker at your side, you are prepared to begin the buying process. Buying your first home should be an exciting process. The best part comes during your first night in your new home. During your first night, you will finally be able to take a deep breath, relax and take pride in the achievement of buying your first home.

Kevin Wolff is a real estate freelance writer for the Seattle P-I.