Can I afford a new home in Minnesota? Worksheet for First Time Home Buyers in Minneapolis, St Paul and Surrounding Suburbs

The following information is beneficial to first time home buyers in Minneapolis, St Paul and surrounding suburbs.

A general rule of thumb is that a home costs about 2.5 times your yearly income.

General Costs
Some of the factors to consider are how much you need for housing related bills (heat, water, etc), down payment, earnest money deposit and closing costs.

Down Payment
When purchasing real estate in Minneapolis, St Paul and surrounding suburbs, you can expect that you'll need a minimum of 3% of the total loan amount for your down payment. Some special financing programs can minimize the 3%.

Earnest Money
Earnest money, is money you put down at the time you write the offer on the property. That money is deposited into an escrow account where it is held by a neutral third party until the property is closed. At that time, the earnest money is then given to the selling party and goes toward the purchase price of the property.

Qualifying for a Loan vs Loan Approval
Before you begin looking for a home, meet with a lender to determine how much home you can qualify for. This is the pre-qualification stage. You are not bound to a lender just because they pre-qualified you and you should not sign any paperwork what would bind you to a particular lender at this stage. Loan approval occurs after and offer has been accepted.

Calculating Amounts and Determining Affordability
A mortgage broker will likely discuss the following with you and you can use the below worksheet

Estimating your maximum home payment:
Gross monthly income___________
Multiply by .28 for a conventional loan___________
or .29 for an FHA loan___________

This number is your maximum monthly home payment.

Estimate your maximum long-term debt payment allowed by a lender:
Gross Monthly Income___________
Multiply by .36 for a conventional loan____________
or .41 for an FHA loan___________

This number is the maximum total monthly debt payment a lender will allow, including housing.

Calculating Household Income & Expenses

Step 1. Your Monthly Income
ADD THE FOLLOWING:

Household income after deductions____________
Interest and dividends____________
Other income____________
Total monthly income___________

Step 2. Monthly Non-Housing Expenses
ADD THE FOLLOWING

Food and supplies____________
Clothing____________
Medical bills including insurance premiums, life insurance and disability____________
Auto Expenses (loan, insurance, gas, repair, parking, license)____________
Education Expenses (loans, current classes, books)____________
Recreation____________
Credit Cards____________
Child support____________
Alimony____________
Telephone____________
Personal expenses____________
Savings and investments____________
Income taxes____________
Total non-housing related expenses___________

Step 3. Monthly Housing Expenses
ESTIMATE AND ADD THE FOLLOWING:

Mortgage loan payment (principal and interest)____________
Property taxes (check with me for a rough estimate based on area)____________
Mortgage insurance (estimate 3.5% of the loan amount for roughly
seven years; after you have 20% equity in your home, lenders must
allow you to drop mortgage insurance)____________
Homeowners insurance____________
Utilities (heat, water, electricity, gas, garbage)____________
Maintenance and repairs (usually 1% of the value of the home annually)____________
Other (condominium dues or assessments)____________
Estimate of total monthly housing expenses____________

Add the total in STEP 2 to the total in Step 3 to see your estimated expenses. Compare this to your income in Step 1. If your estimated expenses are higher than your income, you have some adjustments to make. You either need to lower your expenses or lower your expectations of what you can afford in a home.

Feel free to email me if you would like a paper copy of this spreadsheet.

*Spreadsheet developed in part with the Minnesota Association of Realtors.

Real Estate Financing FAQ for First Time Home Buyers in Minnesota

I often have people ask me about mortgage terminology. Below are definitions of various mortgage terms as they apply to buyers of Minnesota Real Estate.

Conventional Mortgage
A mortgage loan made by an institutional lender without the inclusion of government guarantees such as VA or FHA loans.

Federal Housing Administration (FHA)
An agency of the federal government, the Division of the Department of Housing and Urban Development, that sets standards for the underwriting of private mortgages and insures residential mortgages made by private lenders. Federal Housing Administration (FHA) low-rate loans are available to Americans with smaller incomes who are interested in modestly priced homes. Down payment requirements are usually lower than the prevailing ones.

Veterans' Administration Loans (VA)
Mortgage loans to veterans by banks, savings and loans, or other lenders that are guaranteed by the Veterans' Administration, enabling veterans to buy a residence with little or no money down.

Adjustable Rate Mortgage (ARM)
A mortgage, which allows the lender to adjust the mortgage's interest rate periodically on the basis of changes in a specified index. Interest rates may move up or down, as market conditions change. The change in interest rate will result in a change in the periodic payments due under the mortgage. ARMs are attractive when short-term interest rates are trending lower.

Balloon Mortgage
Usually a short-term fixed-rate loan that involves small payments for a certain period of time with the balance due in a single, large payment at a time specified in the contract. Whenever the balloon mortgage becomes due, the entire unpaid balance is due. Generally, the homeowner must either refinance or sell the property.

Buy-Down
The payment of extra money on a loan now so as to provide a lower interest rate over either a given period or over the life of the loan. To buy-down a mortgage, the buyer pays additional points to the lender, which will decrease the interest rate for a specific period.

Fixed-Rate Mortgage
The interest rate you pay and the monthly principal and interest payments are agreed upon from the outset and will not change throughout the entire term of the mortgage.

Deferred Interest Mortgage
A mortgage in which the payment is not sufficient to cover the principal and the interest and the payment portion of the interest is postponed until a certain date at which time the interest postponed is added to the principle owing.

Wraparound Mortgage
A secondary financing option in which a new larger mortgage is created to encompass the first mortgage. This large second mortgage is used to preserve the low interest rate on the first mortgage for a potential buyer.

Understanding Your Needs as a First Time Home Buyer in Minneapolis, St Paul and Surrounding Suburbs

Whether you live in Robbinsdale, Minneapolis, St Paul or the surrounding suburbs, the following tips will help you make the right decision when you decide to write an offer on real estate with your Realtor.

Drive To Learn about Real Estate in Minnesota

I encourage my clients to either drive with me or on their own to learn more about areas they would consider living. Often times, Minnesota first time home buyers are working within a tight budget and cannot afford their first choice area. By touring different areas with a knowledgable Realtor, you can learn about great and affordable neighborhoods you maybe haven't considered. Consider the following questions as a basis for determining your location needs:

Where is the nearest shopping center, bus line, police station and library?
What schools are available and school district are you in?
What types of homes (single family, apartments, condominiums) are in the neighborhood?
How far apart are the homes?
How far is it to your work?
What community resources are available?
Generally, where are the cars parked (driveways, garages, street)?
Do you notice a lot of noise, traffic or pollution?
Are the homes in good repair and the landscaping well kept?

Keep your eyes open and your notebook in hand as you walk through a potential home. Consider the following questions as a basis for determining your needs as a Minnesota real estate buyer:

How long has the home been on the market?
Why is the home being sold?
What is the asking price of the home?
Has the price been lowered?
Is the price comparable to other homes in the neighborhood?
What is the down payment required?
Is the house structurally sound?
Is there room enough for the present and the future?
Do you like the floor plan of the home?
What condition is the yard in?
What improvements must be made?
Will the seller repair or replace any items that need repair or replacement?

Real Estate FAQs for First Time Home Buyers in Minnesota

Below are common questions I receive from today's buyers. Please feel free to leave me your own questions!

How much does it cost me to work with you?
If your are engaging in the home buying process, my services are free to you. The seller of a property pays all brokerage commissions. I do not charge my clients anything when searching or after we have found and closed on the property.

What properties are you willing to show me?
As your Realtor, I can show you properties listed by me, my brokerage, and any other brokerage. All active listings on the MLS are available for us to view no matter the listing agent or their brokerage. Furthermore, I am often made aware of properties for sale before they are even added to the MLS.

What will you do for me besides send me listings?
In the beginning of our work together, I will ask you questions to fully understand what you are looking for. With my knowledge of the Twin Cities, surrounding areas and greater Minnesota, I am able to guide you around the location(s) you prefer. Further more, I research the market and surrounding markets to help you make the best decision when it comes to the property and area that best suits you. I measure resale-ability, recently sold properties, currently listed properties and expired properties. Having this information helps you be confident in making an offer. I also preview properties before bringing you through. I will work to educate you on pros and cons of each property and what different neighborhoods offer. You can ask me any question and I will work to get you the correct answer the first time.

After we have found the perfect property, I utilize other resources to ensure the successful close of your property. I have access to highly professional mortgage lenders and title closers within my office. My role continues throughout the closing process to ensure all contract deadlines are met and the closer is on track for the closing date. Finally, my role doesn’t end after closing. I have an extensive list of contractors, handy-people and resources should you need them during any time of your ownership.

Is it a good time to buy?
Yes. Especially if you are planning to spend five or more years in your home. Prices are lower and inventory is high. Sellers are more willing to negotiate even lower prices. The real estate market is still and always will be one of the best ways to invest your money. I take serious consideration of the current market challenges in guiding you through this process.

Welcome

I have started this blog to broadcast common real estate questions and answers, post relevant real estate information for buyers and sellers in today’s market. I am a licensed Realtor in the state of Minnesota and work actively in Minneapolis, Saint Paul and surrounding suburbs.