Making the decision to move out of my parents house by the end of the year was not easy. Emotionally I was ready for a change, financially I wasn’t ready to let go of this huge advantage. I am so grateful that my parents were so welcoming and supportive of my goals. They allowed me to live with them rent free. I had three different choices of moving out. Some were more geared towards finances others toward happiness. The choices were to move back into the townhouse and live with strangers. Rent a place closer to the city. Last but not least, buy a new place. After my experience with roommates a few years ago, I decided that I wanted to live alone. I know that this probably is not the best decision for my finances, but that just means I have to increase my income. More on that later.
I started to look at rentals in the city. Thinking of a two bed, two bath apartment, possibly airbnb the second room. This was expensive!!!!! Rents in the city were going for $1500-$1800 for a 2bed/2bath apartment and the possibility to airbnb was very slim. There are rules against subletting in most of the rentals I was looking at. A one bedroom apartment was going for $1200-$1500 a month plus utilities. This was still expensive, mainly because it’s a rental, that’s money that I’m never going to get back. The option was to buy. Ideally I wanted to buy a 2bed/2bath place in the city. Atlanta is a growing city and prices are on the rise. I was looking at something in the city because of the proximity to work, social life and the possibility of value increase. This was also ideal for airbnb since most people want to stay in the city.
I had purchased a house before and thought the second house was going to be the same process. However, I was mistaken. Even receiving a pre- approval letter was more involved the second time around. Things like debt, income, taxes became very important. The plan was to get a second conventional loan. Meaning this property was going to be owner occupied. I was putting down 5% and splitting the closing cost with the seller. My budget was nothing more than $120k. Since I had been saving most of my income, I stopped paying down my student loan and started saving for the down payment.
The bank focused on my debt to income ratio and credit score. They needed to make sure this was lower than 43% . But what is debt to income ratio and why is it important??
Debt to income ratio is all of your debt payments, divided by your gross monthly income. To calculate this, add all of your debt monthly payments. ex: Mortgage or rent, HOA dues, credit card debt, student loan debt, personal loan debt, car debt. This number gets divided by your gross monthly income. This means your annual salary before taxes get taken out. This is important if you want to borrow money.
ex:
Monthly debt payments:
- credit card debt: $150
- student loans: $250
- car loan: $400
- rent: $1,200
- Total: $2,000
Let’s say the annual income is $50,000 meaning income per month is $4,166. This would come out to be a debt to income of about 48%. A percentage this high would make it really hard to get a loan. For this particular scenario paying down some debt would help bring that ratio down and it would also help to increase the credit score. It is important to remember that this is a way for banks to measure your ability to make monthly payments. However, notice that this does not include your cost of living. Things like gas, groceries, utilities, entertainment. Because of this always add your cost of living to any calculation you are doing. Always make sure to run ALL of the numbers when calculating future expenses. Failure to do this could cause you to over stretch your budget and that could have really bad consequences.
After getting the pre-approval letter, the process is the same as a regular mortgage. I started looking for a new place to live. I saw a lot of 2bed/2bath that needed much work. New bathrooms, new floors, new paint. With a small budget to make renovations this was not my first choice. After countless visits to condos in the suburbs, I decided to go with a one bedroom apartment in the middle of the city. I know a one bedroom is not the best investment however in a city that is growing at the rate Atlanta is growing I went for it.
The goal is to buy a property a year or every 2 years and keep growing my portfolio. In order to achieve this, I need to keep a good emergency fund, excellent credit score and a low debt to income ratio. Till next time…..
