If this is your first time buying a home, it can be an anxiety-inducing, confusing journey. But knowledge is power, and with this article, it is my goal that you will become familiar with the elementary rules of home financing. Armed with this new education, and knowing what to do and not to do, will make this journey less rocky for you.First Things First - Your Personal Finances:Are you ready to buy? This question will invoke excitement in you, for sure, but there is time for excitement later. Qualifying for, and then getting approved for a mortgage loan is serious business, especially in light of this chaotic economy we are in. Being prepared for this, will inevitably allow you to qualify for more loan programs, with competitive and lower mortgage rates.You must first answer these questions before you embark on securing a mortgage loan or house hunting.1) Do I have a solid work history for the past 2-3 years? If the answer is no, don't despair. Your spouse/partner may be able to help the qualifying, or if the work separation was seasonal, this may not be a factor.
2) Is your Tax Return in order for the past 2-3 years? - If not, see an accountant first and get these filed/corrected.
3) How is my credit? If you have bad credit or no credit, you may qualify for a loan, but the interest rates will be higher. If you are not sure how your credit is, obtain a recent copy of your credit report from each of the 3 credit bureaus: Experian, Equifax, TransUnion. NOTE: Americans are always entitled to a free copy every 12 months, and if you are unemployed, if you collect public assistance, or have recently been denied credit.
4) What are my current debts? If you have large credit card balances, have several open accounts, unpaid student loans, car loans, etc., you could be denied a mortgage because you have what's called "too much open credit".
5) What is my banking history like? If you have negative balances, accounts closed by the bank, or several overdrafts, you'll want to clean this up and pay any balance owed before going for a mortgage. Bring payment receipts with you to prove payment.
6) How much can I put down? Although in many cases this is not required, and low mortgage rates can still be found via programs such as FHA and VA mortgages, putting up to 20% of your own money down as a down payment, can save you from paying PMI - Private Mortgage Insurance, which is a fee that can be both added to the initial loan amount, and added as an extra monthly expense.
7) What other Income Do I possess? If you receive income from dividends, alimony, child support, a settlement, disability, etc., this can help your application if your employment income is low, infrequent, or credit is compromised.By answering these questions honestly and thoroughly before you begin your search, you will be well prepared to work with a realtor and a lender, and the process will flow more quickly and smoothly because you've done this homework. Another bonus is that you'll have all this documentation organized and won't have to gather it piecemeal, thereby delaying the process and wasting time.Ready? Time to Do the Math:Just because you have met all the above criteria, there is no guarantee that you can afford that new home. Now, it is literally crunch time.A mortgage lender will begin processing your application by calculating your Debt-To-Income Ratio. This is the difference between what you owe in debt such as credit cards, student loans, car loans, bank loans, rent, and your total income.Calculate Your Debt-to-Income Ratio:o First, list your total monthly income. Include salary, commissions, disability, public assistance payments, alimony, child support, settlement payments, dividends and pensions.
o Next, list all your current open debt. NOTE: When listing debt, do not include regular household expenses such as child care, food, and clothing, unless these purchases are made with a credit card.
o Divide your Total Monthly Debt by your Total Monthly income. Many mortgage lenders today prefer to see a Debt-To Income Ratio of 0.36 (known as a score of 36) or lower. The higher the score, the higher your interest rate will be, and therefore the higher your mortgage payment or your down payment. Typically lenders will allow you to surpass this Debt to Income ratio; however we need to also make room for property taxes, homeowners insurance, and possibly Private Mortgage Insurance, and/or condo association fees.
o To find out where you should be with your proposed mortgage loan included, also multiply your Total Income times this general.36 multiplier (to compute your maximum allowed monthly debt based on a 36% Debt-to-Income ratio).
o Lastly, subtract your current total debt from the.36 amount, to find the difference. This is where you should strive to stay under, for your mortgage payment! This will also tell you if you need improvement in this area. Depending on where you want to be, perhaps you should work on paying off some other debt first, increase your down payment, adjust your ideal price ranges for a new home, and/or the total mortgage loan amounts.Fine Tuning Your Numbers:Now that you have a rough estimate of what your max monthly debt and mortgage payments should be, you can also fine tune your numbers, once you know other loan parameters. NOTE: Some of these extra parameters may not be known, until a home is found. Some other factors to consider are the terms of the loan, the mortgage interest rate, property taxes, homeowners insurance, condo/homeowners association fees, and depending on the amount of your down payment, Private Mortgage Insurance may also be tacked on to your monthly payments!
