No homeseller is likely to look at your offer if you aren't pre-approved for a loan, so you know at some point you'll have to submit multiple documents and copious information to a mortgage broker who will crunch all the numbers and arrive at loan amount that you can, ostensibly, afford. However, this doesn't mean you shouldn't have a fair idea about that number already.
Terms to Know: Loan lingo is heavy on acronyms. Don't let it depress you: you can conquer the obscurity by making a list of things like "PITI, PMI, APR, APY," and the corresponding definitions, just as you would when going to a foreign country and trying to learn some basic survival phrases. Here is another you should know:
Your Debt-to-income (DTI) ratio: Simply, figure out how much you make each month and how much you spend. The percentage of your income spent on the mortgage plus any other debts shouldn't be dangerously high. Your mortgage covers your house payment, property taxes if you wrap them in, and your interest. But monthly bills also include things like a car payment, student loan and credit card payments plus HOA fees and private mortgage insurance if these apply, not to mention utilities, home insurance, car insurance... and oh, yeah, food and stuff you need to live-- not to mention the occasional movie or sweater or whatever.
You can calculate your DTI and see the current limits placed on it by lenders for both conforming and non-conforming loans with the help of Wikipedia, among other sources.
Downpayments: In today's San Francisco market, buyers who can provide 20% down (or more) generally have an advantage over buyers with only 5-10% down. That doesn't mean you can't get a loan, or a house, if you don't have all the cash up front though, just that you may pay more interest on your loan and will have to compete even more than usual for those properties available to you. Check out the latest on downpayment guidelines for FHA loans from the source.
Also you should note: when you put down less than 20% on a home, you have to pay for Private Mortgage Assistance (Acronym alert! That's a PMI in loan lingo). The payment adds into your mortgage, making that monthly expense higher. And, PMI rates in the U.S. are set to go up in April of 2013.
The Department of Numbers which analyzes all property types of sale (TIC, land, short sales, market rate sales, et all) reports that in the first weeks of March, 2013, the median asking price for a home in San Francisco is $599,888. Most of us will recognize this number seems a bit low, given that so many of our local homes sell for well over a million. But there are two things to recognize in this number. 1) Can you afford 20% of such a figure? Do the math: it's $119,977.60 cash you need, and that excluded closing costs, appraisal and home inspection fees. 2) An asking price is not a selling price. That leads to our final lesson for today.
Asking vs. Selling: You will save yourself much time and heartache if you realize early on that the asking price of a home does not translate to its selling price. Two years ago, even less, that truism may have worked in your favor, but in the current market, with low inventory and high demand, it often won't. A savvy seller's agent, hip to the desperation of SF would-be-homebuyers, can set the price of a home artificially low in order to incite a bidding war. Essentially then, the "reasonable price" you found on the internet is just a pawn in an elaborate game you can't afford to play. Make sure you ask your Realtor to get the inside scoop on a home for sale: s/he, if worth any dollar of her/his commission, will know if a price is being set low strategically, and if you can't bid up, won't waste your time by showing you that property. In the meantime, check comparable sales (AKA "comps"): if the similarly sized, similarly constructed home next door to a home you like sold for $1.5 million two days ago, yet this home you like is listed for only $600K, you can guess the price is akin to blood in the water, and the sharks will follow.
Above all: know your own price point. How much mortgage can you pay, given what else you want to do with your money every month? Will you sacrifice size of home for neighborhood? Can you afford a bidding war? As in all aspects of life, know thyself. The best decisions will follow.
· See all Curbed University posts [CurbedSF]
· PMI Fees Set to Increase in 2013 [F and F Homes]
· The Department of Numbers/San Francisco County [official site]