June 4, 2009

This Could Blow Your Home Purchase

I have been telling you how important it is to get pre-approved for a home loan before you go shopping because sellers require a pre-approval letter from your lender to accompany a purchase offer. Sounds pretty basic … right? A lender compares your income to your expenses and then tacks on a proposed housing payment to arrive at your Debt-to-Income Ratio or DTI. That’s the Readers Digest version. Here’s what you need to understand. The proposed housing payment includes principal, interest, hazard insurance, and property taxes. Let’s save for another time how we calculate those items to arrive at your housing cost and focus on what costs are NOT included in the DTI ratio.

1. Mellos Roos *
2. Home Owners Association Dues (HOA)
3. Flood Insurance

Assuming you have no specific property in mind and are still looking for the right one, make sure you know if any of these items are associated with the property you plan to make an offer on. Flood insurance can double your insurance costs. Mello Roos vary by area and can add hundreds of dollars to your monthly property tax expense. The same goes for HOA. Any one of these additional housing costs can cause your DTI ratio to exceed your loan approval. The best thing to do when you come across a home with any of these additional costs is for your real estate agent and mortgage professional to run the numbers and see if you still qualify. Just one more example of why you need a real estate agent and mortgage professional who know each other, have clear communication and are on the page … You benefit big time!

* Note: Mello Roos is a tax used to finance or underwrite the cost of public improvements or infrastructure (such as sidewalks, utilities, roads, recreational facilities, schools, libraries, fire stations) in a new development. The tax stays in place until the bond is paid in full. Mello Roos taxes are not deductible unless they are for maintenance and repair of local improvements.