Loan Information
Before beginning to search for any property, it is best to first determine the price range that you can qualify for, (see How Much Can I Qualify For? below). This can eliminate wasting valuable time looking at houses you cannot afford to buy. With accurate information from you, your real estate agent
and/or lender should be able to estimate fairly closely how much
house you can qualify for. A lender can also explain all the
different loan options that are available as well as point out any
possible financial situations that could affect your borrowing
strength. Lenders will often consider your credit history. A general rule of thumb to determine your borrowing strength is
that you can afford to purchase a house valued at
twice your annual income. If you would like help obtaining you loan don't hesitate to contact us.
Your home is collateral for the loan, which is also a legal contract you sign to promise that you'll pay the debt, with interest and other costs, typically over 15 to 30 years. If you don't pay back the debt, the lender can take back the property and sell it to cover the remaining amount of the loan. Therefore, it is very important that you accurately determine what you can afford.
Your payments will typically include the principal, interest, taxes, and insurance. The sum of all of these together is generally known as PITI. The pricipal is simply the sum of money that you borrow to buy your home. The interest is what the lender charges you to use the money that you borrow. The lender may charge you additional loan costs which will be included in your monthly payment. Taxes are the property taxes your community levies. Taxes are based on a percentage of the value of your home and vary widely from community to community. Insurance covers your home and personal property against losses from fire, theft and other events. Lenders won't let you close the deal on your home without insurance as this is their protection against loss of collateral. If your home is in a federally designated high flood risk zone, you may also have to buy flood insurance.
When determining what you can afford, most lenders actually consider two rules:
- Your total monthly mortgage payment which includes the total loan payment
including principal, interest, taxes, insurance, and homeowner's
association dues, if any. The total should not exceed 25 to 28% of
you monthly gross income.
- The sum of your total mortgage payment plus the sum of all other monthly
payments on long-term debts (those that require payments for
more then 9 months) should not exceed 33 to 36% of your total
monthly gross income.
Whether the lender uses the top or the bottom of the range depends on the size of the down payment you plan to make. For example, if you are paying 10% down, lenders probably will use the 28% and 36% figures; if you are paying 5% down, they will use the more conservative 25% and 33% figures.
These rules can also vary with the type of loan. All lenders have other, additional requirements that must be met.
Up-Front Costs
Up-Front costs must be considered thouroughly when determining how much that you can afford for your down payment. A larger down payment can reduce your mortgage payment, but most first-time buyers cannot afford to put all of their savings into a down payment because of the "up-front" expenses. Most of these are closing costs (bank fees, points, insurance, escrow amounts, attorney fees, state and county fees, survey, title insurance, and inspections). Other possible up-front expenses include moving costs, minor repairs and furnishings (towel bars, shelving, and so on), and money paid to the seller for items not included in the purchase offer (drapes, porch swings, special light fixtures, appliances).
How Much Can I Qualify For?
Use the following set of calculations to estimate the maximum loan (and housing price) that you will qualify for. Although this is the standard format followed by many financial institutions, please keep in mind that it is just an estimate. You will need our Mortgage Calculator to perform one of these calculations.
- Determine your annual household gross income (Use last year's tax returns). example: $60,000
- Divide this by 12 to determine your monthly gross income. example: $5,000
- Decide on a percent of income to be spent on long term debt (use .33 to .36 depending on the size of your down payment. See above) example: .34
- Multiply your monthly gross income by the percent of income for long term debt. example: $1,700
- Determine your monthly debt repayment (charge card, car payments) example: $350
- Estimate your monthly expenses for property taxes, insurance, and utilities. example: $375
- Add your monthly debt repayment and your amount from the property taxes, insurance, and utilities. example: $350 + $375 = $725
- Determine your available monthly mortgage payment (subtract the above sum from your amount available for long term debt) example: $1,700 - $725 = $1000
- Monthly payment per $1000 of mortgage (the example uses a loan amount of $1000, an interest rate at 7.5 percent, 360 payments, at 12 payments a year) See our mortgage calculator. example: 6.99
- Divide your monthly mortgage payment by your monthly payment per $1000. example: $1000 / 6.99 = $143.06
- Determine the amount to be loaned by multiplying the above result by $1000. example: $143.06 * $1000.00 = $143,060.00
- Now subtract out the percent of the down payment from 1 (in the example we will use a down payment at 5 percent down). example: 1 - .05 = .95
- Determine the amount of your affordable home price (divide the amount of the loan by the percent of the down payment) example: $143,060 / .95 = $150,589.47, your affordable home price
What About My Credit History?
Your credit history can be a very important factor in determining the amount of credit you can be approved for. Its important to verify that your report is accurate. There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you recieve your report, double check the 'high credit limit', 'total loan', and 'past due" columns. If you find a mistake you should try to correct it as soon as possible. You will need to write to the reporting company, point out the error, and provide proof of the mistake. You may also request to have your own comments added to explain problems. Lenders are usually understanding about legitimate problems. You probably won't know which company will be providing your lender with a report so its best to get copies from all three companies to make sure that there are no mistakes. Fees usually range from $5-$20 a report, but some states have laws that allow you to obtain a free one. In order to obtain your credit report, call one of numbers listed below:
CREDIT REPORTING COMPANIES
Experian 1-800-682-7954
Equifax 1-800-685-1111
Trans Union 1-800-916-8800
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