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| Financing a Home | |||||||
| Additional Resources: The Attorney's Guide to Credit Repair Mortgage Loan Tips Additional Reference Material |
If you are planning to finance a home, and are new to the buying a home process, there are a few things that you can do on your own in order to prepare yourself for what you will hear from a lender. Please remember that everyone's situation is different and that the below information is intended for you to apply to your unique situation. Your credit rating (which is looked at differently by different lenders), the housing market, and other factors all play a very important role in determining your specific eligibility for a loan. The numbers used for factoring below are for guidance only, to get specific information, you will need to talk to a lender or mortgage broker. |
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DEBT TO INCOME RATIO In order to determine how much house you can afford on your own, you'll need to determine your debt to income ratio. Keeping in mind that each lender is different, the following numbers can vary. First determine how much HOUSE you can afford. Lending companies will typically allow between 25% and 35% of your gross income to be used for all housing costs (this usually includes mortgage payment, interest, taxes, insurance, home owners association fees). Yes 25% - 35% is a wide margin, however this number can vary depending on such factors as housing market, personal credit score, and so on. Figuring that your annual gross income is $50,000, divided by 12 months = $4166 monthly gross income. That means that, on the lower end, 25% the lender will allow you to spend $1041 towards housing a month. On
the higher end(35%), a lender may allow you to spend $1458 a month
towards housing costs. The next step in figuring the debt to income ratio is to determine your recurring debt. Looking at your monthly minimum payments (you can get this from your credit report) for all credit cards, car payments, and the like, add this monthly number to the monthly housing number. So if you have $350 combining a car payment with a credit card payment each month, you would add this to the lower end number of $1041 to arrive at $1391. Now, use this number ($1391) and divide it by your monthly gross income number ($4166 above) to arrive at your total (with a new house) debt to income ratio. If this falls less than 35% you may easily prequalify. As the market changes and each lender uses a different number, this number can range anywhere from 35% to 42% as well. |
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DOWN PAYMENT
Different
types of loans will have different down payment amounts. Where a
conventional loan may require 10% down, while other programs may offer
a lesser amount of down payment. Also it is important to ask the
mortgage broker or lender whether you will receive a lower interest
rate if you can afford to put a larger amount down than they require. OUT OF POCKET COSTS AND WHAT TO EXPECT FOR
CLOSING COSTS Another
important note to consider when determining how much money out of
pocket it will cost you to buy a house is that there may be other fees
that you, the buyer, are expected to pay. For example, it is not
uncommon for the buyer to pay both agents'(realtors') fees which
typically fall in the range of 3% of the sale price for each agent.
That is paying for both the buyer's real estate agent as well as the
seller's agent (totaling 6%). These fees are generally based upon a
percentage of the sale price of the home. There will be fees for the
title company (handle the paperwork necessary to transition the
property from seller to buyer), the inspector, etc. In some cases you
may also have to prepay insurance and taxes before the transaction can
be completed. Your realtor will be able to provide you guidance and
specific information regarding costs that you will be expected to pay
at the time of closing (when you sign the paperwork with the title
company). DON'T BE AFRAID TO ASK YOUR REALTOR,
LENDER, MORTGAGE BROKER. If they know you have concerns up-front, they
may be able to negotiate a deal or find products that are tailored to
your needs! |
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Without going to a mortgage lender and having them prequalify you, there is no way to be certain that you are will be able to borrow the amount for a house that you desire, especially with the ever changing housing market. However, if you can determine your credit score and your (without a home cost) debt to income ratio, you may be able to call or look online to get a fairly good estimate as to whether you will qualify. You will want to select a mortgage broker or lender based upon your personal needs and situation(s). Don't be afraid to shop around before deciding on one to use. However, be mindful that if you are shopping around, having each location do an inquiry on your credit report, may have an adverse affect if/when you decide to begin the process. When discussing loans with a mortgage broker (lender), also make sure that you understand the different types of loans available to you. This includes but is not to limited to FHA, VA(Veteran's), and conventional. |
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