Mortgage Calculator
Mortgage Articles
Mortgage Glossary
|
| Back to Articles Main Page |
| How Much Can You Afford? |
| Understanding
how much you can afford is one of the most important rules of
home buying. Depending on your individual situation, your budget
can affect everything from the neighborhoods where you look,
to the size of the house, and even what type of financing you
choose. |
| Bear in
mind, however, that lenders will look at more than just your
income to determine the size of the loan. Likewise, you may
find that there are some creative financing options that can
help boost your purchasing power. |
| Loan prequalification vs. preapproval |
| One of
the best ways to determine your budget is to have your real
estate agent or lender prequalify you for a loan. Prequalification
is different from preapproval, because it is only an estimate
of what you'll be able to afford. On the other hand, preapproval
is a more formal process where a lender examines your finances
and agrees in advance to loan you money up to a specified amount. |
| What factors are important to lenders? |
| Banks and
lending institutions will use several criteria to determine
how much money they'll agree to lend. These include: |
| Your gross monthly income |
| Your credit history |
| The amount of your outstanding debts |
| Your savings--or the amount of money you have available for
a down payment and closing costs |
| Your choice of mortgage (i.e. 30-year, FHA, etc.) |
| Current interest rates |
|
| Two important ratios |
| Lenders
also use your financial information to figure out two, very
important ratios: the debt-to-income ratio and the housing expense
ratio. |
| Debt-to-income ratio |
| Many
lenders use a rule of thumb that the amount of debt you
are paying on each month (car payment, student loan, credit
card, etc,) shouldn't exceed more than 36 percent of your
gross monthly income. FHA loans are slightly more lenient.
|
| Housing expense ratio |
| It
is generally difficult to obtain a loan if the mortgage
payment will be more than 28 to 33 percent of your gross
monthly income. |
|
| Down payments make a difference |
| If you
can make a large down payment, lenders may be more lenient with
their qualifying ratios. For example, a person with a 20 percent
down payment may be qualified with the 33 percent housing expense
ratio, while someone with a 5 percent down payment is held to
the stricter 28 percent ratio. |
| Other ways to improve your purchasing power |
| Gifts |
| If you're having trouble saving money, many lenders will
allow you to use gift funds for the down payment and closing
costs. However, most lenders require a "gift letter"
stating the gift doesn't have to be repaid, and will also
require you to pay at least a portion of the down payment
with your own cash. |
| Negotiating Closing Costs |
| Through
negotiation, some sellers may agree to pay all or most
of your closing costs (for example, if you agree to meet
their full asking price). If you choose to try this, make
sure to ask your real estate agent for advice. |
| Loan Programs |
| Many
local governments have special loan programs designed
to help first-time homebuyers. Loans may be available
at reduced interest rates, or with little or no down payments.
Check with your local housing authority for more information. |
| Loan Types |
| Some homebuyers choose Adjustable Rate Mortgages (ARMs) because
of low initial interest rates. Others opt for 30-year
loans because they have lower monthly payments than
15-year loans. There are significant differences between
different loans, so make sure to discuss the pros and
cons of different loans with your agent or lender before
making a decision. |
