First Time Buyers

The Four Keys To a Successful Inspection

As a prospective home owner, what key items should you look for when the inspection report comes back?  How do you know what items might be potential deal breakers and which are simple repairs? I recommend you start by looking into these 4 categories of major home repairs.

1.     Roof- How old is the roof?  Has it had any previous repair? Have there been any leaks due to problems with the roof? 

A standard roof life is 15-18 years and can cost between $6,000 and $16,000 to repair, depending on the size of the home and on insurance coverage.

2.     Foundation- Has there been any significant shifting or cracks along non-natural seam lines?  Does the floor dip or shift in some parts?

You are looking for the inspection report to say that there has not been any standard significant movement of the foundation.

3.     Electrical- Is the wiring aluminum or copper? Copper wiring is more widely used in homes today due to its greater conductivity and heat resistance.   Aluminum wiring can still be found in some older homes.  Aluminum is much harder to repair than copper wiring, does not conduct energy as well, can tend to overheat and cause damage, and greater care has to be taken to install it properly in the home.  

Ideally you are looking for the inspection report to say that the home uses copper wiring and that no significant electrical issues were detected.

4.     Plumbing- Is the plumbing cast iron or PVC?

Cast iron plumbing will eventually rust from the inside out and should be cleaned out annually to remove build up.  Cast iron was used heavily in construction during the WWII era, so many older homes might have cast iron plumbing in use.  Cast iron is not a deal breaker, but it requires more upkeep and maintenance and can require contractors to dig underground through the slab to get to the pipes. 

Look for the use of PVC piping in the inspection report. If cast iron is used, make sure you understand how it can be accessed for future inspection and repairs and get the inspector to give you a status report on the integrity and lifespan of the cast iron used.

Debt-to-Income Ratio

Your debt-to-income ("DTI") ratio is a valuable number when purchasing a home, especially when financing the purchase. The easy part of DTI is what it means... the amount of debt you have vs. the amount of income you make. How is the DTI ratio used? What is an acceptable DTI ratio when purchasing a home?

Lenders look at DTI during their underwriting. It influences how much they will lend you. There are two main kinds of DTI; front-end ratio and back-end ratio. Both affect lenders' decisions.

Front-end ratio indicates the percentage of income that goes towards housing costs. The "D" in DTI stands for "Debt," but it covers more than debt, including taxes, HOA dues (if applicable), insurance, fees, and insurance premiums, all on top of the principal and interest payment.

Back-end ratio indicates the percentage of income which that goes towards all recurring debt payments, including front-end debts plus credit cards, car payment, child support, student loans, legal judgments, etc.

Currently, DTI limits are as follows:
Conventional loan limits 28/43
FHA loan limits 31/43
VA loan limits 41/41
USDA loan limits 29/41

(The first number represents the (%) limit of the front-end ratio/second number represents the (%) limit of the back-end ratio)

EXAMPLE:
A couple's monthly income is $7,100 (gross monthly income or income before taxes). The couple has two cars, one car is paid off. The second car is financed with a minimum payment of $450 per month. They also use credit cards with minimum payments of $50 (total).

Considering a conventional loan, find their maximum PITI payment considering the couple's monthly income.
This question is a front-end DTI question. $7,100*28% = ~2,000

What purchase price can they afford given their monthly PITI payment? $2,000 PITI Payment = ~$310,000 purchase price

Does their total debt qualify under the conventional loan DTI limits?
$2,000 + $450 + $50 = $2,500 in total recurring debt
$2,500/43% = ~$5,814 They do pass the DTI back-end limit as their monthly income of $7,100 is above $5,814.
-or-
$7,100*43% = ~$3,050 Again, they do pass the DTI back-end limit as the monthly debt of $2,500 is below $3,050.