The Top 10 Tips to Help Homebuyers Thrive in Today’s Current Home Market

Tips for Buying a Home Right NowThe economy has been slowly recovering for a while now, and home prices are starting to show it. An improving national economy means more people are getting new jobs, which means that the need for homes is also increasing. Some people want to buy a home because they don’t want to throw money away by renting anymore, some are changing jobs and need to move to a different part of the country, while others have found a better job and feel the need to upgrade their home.

No matter which category you are from, the increasing home prices and the raising interest rates are probably making you want to act quickly, before prices and interest rates go even higher. Prices and interest rates are much lower than they were before the housing market crash, but analysts say that they will keep increasing, so buying a home right now might not be such a bad idea (Read: 4 Things Home Buyers Should Look Out For With Mortgages Rates on the Rise).

However, needing a home and actually being able to buy one, or buy it at a good price, are very different. Getting approved for a mortgage loan is not that easy, especially if you are also recovering financially. Your credit score, income and debt will have a large influence on whether you will be approved for a mortgage or not. Even if you get approved, but you don’t have an ideal credit score or debt-to-income ratio, you will probably have to pay a much bigger price for the home. Also, getting a mortgage involves a large financial investment, which means that you will probably have to use some or all of your savings.

Tips for Buying a Home in Today’s Home Market

Getting a good deal and making sure that you don’t end up with a mortgage that you can’t afford can be done by doing a little research, consulting a mortgage professional, and having common sense. Here are the top 10 tips for those who are planning to buy a home in today’s home market. For even more reasons and tips see this.

  1. Figure out what you can afford. Put together a financial plan, which will help you determine how much you can afford. Home prices are still fairly low, but that doesn’t mean that you can go ahead and buy any home just because it’s cheaper than it was in the past. Having a mortgage that you can barely afford will cause problems in many aspects of your family’s life, and can result in losing the house. If you think you can’t manage setting up a financial plan, you can find a consultant who will work with you to determine how much you can afford to spend on a home (Read: Most Affordable Housing Markets in the US 2013).
  2. Start saving for the down payment. On a traditional mortgage, the required down payment is 10 to 20 percent. Even 10 percent can mean a large amount of money if the property that you plan on buying is expensive. Also, in order to avoid paying for Private Mortgage Insurance, you should aim to make a 20 percent down payment. By putting more money down, you also have the chance of receiving a better interest rate, which will help you save even more. If you can’t afford to make a 20 percent down payment, saving for it before you start looking for a home is a great idea (Read: Making a Larger Down Payment: Is it Worth it?).
  3. Try to improve your credit score. You need a good credit score to qualify for a mortgage, so anything less than what is considered a good credit score will result in rejection. But even if your credit score is in a “good” range, having a higher credit score will allow you to qualify for more advantageous rates, so you should do everything you can to increase it. Start by taking out a copy of your credit report, which you can get for free once per year, and look for any mistakes. These mistakes should be reported to the credit agency and corrected.
  4. Avoid making new debt. New debt can decrease your credit score, making it harder for you to qualify for a good interest rate. Also, lenders don’t like giving out large loans to someone who seems that is living on credit. You might think that opening a new credit card account will help your credit score, but it is actually the opposite. However, you should keep and use your old credit card accounts.
  5. Pay off some of your debt. Lenders will take your debt-to-income ratio into consideration when deciding on whether to give you the mortgage loan or not. Paying off some of your debt will help your ration, increasing your chances of being approved. Of course, to pay off some of the debt, you will probably have to use some of your savings, making it difficult for you to raise the 20 percent needed as a down payment.
  6. Get professional help. Hiring someone to work out a budget for you will help you figure out how much you can afford and save you a world of trouble in the future. After figuring out a price range for your new home, you should consult a real estate agent to help you find a home. Not only will a real estate do things quicker, but he or she also has access to more home listings, which will increase your options.
  7. Get pre-qualified and pre-approved for a mortgage loan. Getting pre-qualified for a mortgage loan is relatively easy. All you need to do is provide the lender with some info about your financial situation. Unfortunately, being pre-qualified for a mortgage means very little when the time to buy a home comes. Being pre-approved, on the other hand, is very important because things will move much quicker once you find a home that you want to purchase.
  8. Hire a home inspector. You might think that you have found your dream home, but unless you hire a professional to carefully inspect the property, you might have to pay for a new roof or plumbing system in only a few years. This is especially important if you are buying a distressed property. Hiring a home inspector will add to the cost of buying a home, but it’s probably the best few hundred dollars that you will ever spend. To read more about the reliability of a home inspector click here.
  9. Hire a real estate attorney. Ensuring that you understand all the terms and conditions in the contract, and what is included in the purchase price means a lot when making a home purchase. This is one of the largest purchases you will ever make, so even if your lender has an attorney present at closing, hiring your own will make sure that your interests are represented during the whole process.
  10. Start planning early and don’t be in a hurry to make a purchase. Because buying a home involves such a large initial investment, you shouldn’t rush into buying a home, even if prices are rising. Only make a home purchase after you have set a budget, the home has been thoroughly inspected, and you are sure that you can qualify for a good interest rate. Making a quick home purchase might work for seasoned investors, but a simple home buyer should take more time before making the decision to buy a home (Read: Renting vs. Owning: Which is Best for You?).

Buying a home in today’s home market requires you to act more quickly, but older home buying rules still apply, especially because you can still find many distressed properties in certain areas of the country at better prices. Making a home purchase can be a great experience if you take the time to set your budget up, do the research and make sure that you qualify.

Beware of the Bait and Switch Mortgage Strategy

Beware of the Bait and Switch Mortgage Strategy-150x150The real estate market has its share of crooks and scammers just like any other industry. Unfortunately, the ones getting scammed are usually hard working Americans who just want, like most people, to become home owners. Becoming a home owner is difficult and expensive enough without getting tricked by lenders and mortgage brokers, so you will have to pay a lot of attention when buying a home, especially if it is your first time doing it. If you are not careful, you can end up with a mortgage that is much more expensive than what you can afford, and you will have to struggle to make your mortgage payment each month, or eventually have to abandon your home.

What is the Bait and Switch Mortgage Strategy?

When buying a home, you can encounter dangers at every corner: from thieves posing as lenders or lawyers, who usually prey on the elderly, to the old bait and switch. Bait and switch happens when a customer is offered something for an attractive price, also known as the bait, which will no longer be available when the customer decides to go ahead and make the purchase. After the customer realizes that the initial offer is no longer available, he or she will be presented with a new offer, with less attractive terms, also known as the switch.

Lenders usually do the bait and switch by advertising low interest rates in order to get many potential home buyers interested. These interest rates are promoted in newspapers, on TV, on the radio, on billboards and posters, but, when the customer shows up and applies for a mortgage, he or she is told that those were last week’s rates or that they are reserved only for those with very high credit scores and a very good financial situation. Of course, because bait and switch is illegal, lenders disclose all this in the small print, which is usually too small to read in a newspaper, moves too fast to be read on TV, or is simply disregarded by most people who are looking for a mortgage.

The truth is that interest rates change too often for the advertisements to be truthful. Commercials on TV and the radio are very rarely modified to display the correct interest rate, so they may run for a couple of months advertising an interest rate that was offered a long time ago, and the rate can be much higher at the present time than it was before. Even live interviews advertise rates that are at least a few days old. When home buyers call the lender to inquire about the low interest rate, they find out that the rate is no longer available, but are offered a new rate. This new rate won’t be as great as the one that is advertised, but is usually not that much higher. However, a small increase in interest can mean thousands over time, so make sure that you understand how much more you will be paying before taking the lender’s offer. Ads in newspapers are also at least one day old because it takes at least one day for the newspaper or magazine to get published.

In a perfect world, interest rates would not be advertised unless they were actually available for everyone. While some lenders are truthful when advertising interest rates, most take advantage of things like fine print and are just happy to get customers interested, even though they are unable to offer what they promised. Unfortunately, many home buyers fall for the bait and switch due to the fact that many lenders are doing it. When searching for a mortgage you should give yourself time to shop around and find what’s best for you, and not let lenders use the bait and switch mortgage strategy on you. If you are not satisfied with a lender’s offer, always be ready to turn around and walk away.

Should You Pay for Your Home in Cash Upfront?

Should You Pay for Your Home in Cash Upfront- 150x150Generally, people buy homes by taking out mortgage loans, which they will pay back over a number of years. Those who have better financial situations have the option of paying upfront for the home, and not have to deal with the hassle of making mortgage payments each month. Paying cash upfront for a home if you have the financial means sounds good and has its advantages, but it also comes with a few disadvantages that have to be taken into consideration before making this step. Before investing a large sum of money into a home, you should take a close look at your financial situation and your long-term investment strategies.

How to Buy a Home with Cash Upfront

Before buying a home with cash, try to evaluate all your assets and financial obligations in order to determine if you really can afford spending all that money at once. Make sure you have enough money to continue paying off any debt that you might have, health insurance, school tuition and other current and future expenses. If you come to the conclusion that you can afford paying upfront for a home, the next step would be determining how much you can realistically spend on a home. Aiming for a budget that’s smaller than what you can really afford is a good idea, because there will probably be some fees and costs that you will overlook.

Start searching for a home in the desired area or hire a real estate agent to do it for you. Hiring a real estate agent means that you will have to pay an extra commission, but it will increase your chances of finding a home quicker, and maybe even cheaper. After finding a home, it is time to make an offer. If the appraiser agrees with the selling price, make sure that you offer a deposit immediately. Also, be prepared to provide documentation that proves you can afford to buy the home in cash. Arrange a closing date and prepare a check for the full amount of the price that was agreed upon.

Advantages and Disadvantages

The largest advantage to buying a home with cash is that you won’t have to pay interest on a loan. At 4 or 5 percent, interest rates seem low, but they will become tens of thousands of dollars over time. Not paying interest can save you a lot of money that can be invested into something else. Another advantage which will save you a nice sum of money is that you won’t have to pay closing costs, like you would when taking out a mortgage loan. Application fees, mortgage insurance and other fees can cost you several thousands of dollars, even up to 4 percent of the home price. Last, but not least, paying cash for a home offers you security. If you lose your job or have other financial trouble, you won’t be in danger of losing your home.

The biggest disadvantage is that you will have to spend a large amount of money at once when buying a home in cash. That money could have been invested into something that would yield a better return. Another disadvantage is that, if you come across financial hardships in the future, it would be more expensive for you to borrow money than it would be for someone with a mortgage. A third disadvantage would be that home owners who have bought their homes with cash upfront don’t receive any tax deductions, unlike those who have bought their homes with a mortgage.

Paying cash for a home has its advantages and disadvantages, but your decision should also be largely influenced by your financial situation. Buying a home with a mortgage loan while interest rates are low might be more beneficial, but, as interest rates rise, it makes more sense to pay for your home in cash upfront.

Answered: Your Most Burning Questions About Mortgage Interest Deduction

Answered-Your Most Burning Questions About Mortgage Interest Deduction- 150x150Mortgage interest deduction has been around for a long time and has helped support the real estate market in the United States. This saves a significant amount of money for home owners, especially for those who have recently taken out a mortgage loan. Having this tax deduction makes home ownership more affordable because it reduces the home owner taxes. Here is a list of the most common questions about mortgage interest deduction and the answers that you are looking for:

Top 5 Mortgage Interest Deduction Questions

  • Question 1: Do the rich benefit more from mortgage interest deduction? The truth is that, while mortgage interest deduction is beneficial for rich people, it mostly benefits middle-class families. 86 percent of the households who take advantage of mortgage interest deduction have an income of less than $200,000, with most of these households including the incomes of two married people.
  • Question 2: Would eliminating mortgage interest deduction affect the economy and the housing market? Eliminating mortgage interest deduction would affect both the housing market and eventually the economy. Home buyers would be less attracted to buying a home, which would result in lower home prices due to low demand. Current home owners would experience major losses because they would find themselves with underwater mortgages. Falling home prices and less home buyers would mean that tax revenues would decrease, which would have a large negative impact on the economy.
  • Question 3: Is it true that only a small percentage of home owners claim mortgage interest deduction? Almost all home owners with a mortgage take advantage of mortgage interest deduction at one point during home ownership. In fact, over 70 percent claim mortgage interest deduction in the first year of home ownership.
  • Question 4: Would everyone have to pay more in taxes if mortgage interest deduction was eliminated? The middle-class would be most affected if mortgage interest deduction was eliminated. The taxes that middle-class households would have to pay would be much higher than what upper-class households would have to pay.
  • Question 5: Does mortgage interest deduction encourage people to buy larger homes? Generally, the size of the home has more to do with the size of the family which buys it. Of course, bigger families need a bigger home, so they will have to pay more interest, which means they will benefit more from mortgage interest deduction than families who purchase smaller homes.

There are a few misconceptions surrounding mortgage interest deduction, but the bottom line is this: most home owners can take advantage of mortgage interest deduction. You shouldn’t choose a home based on how much you will save with mortgage interest deduction, but remember that owners of larger homes save more money over time. Eliminating mortgage interest deduction would most likely have huge negative impact on the economy, so you can still take advantage of it for the foreseeable future.

 

How Do Changes in Interest Rates Affect the Housing Market?

How Do Changes in Interest Rates Affect the Housing Market- 150x150Most people have to take out a mortgage loan in order to become home owners. Whether the mortgage loan has a fixed or adjustable rate, a long or short term, you will have to pay interest. How much interest you will be paying on your mortgage loan depends on many factors, such as the loan type, the repayment duration, or how big your down payment is. These are the factors that will influence the interest rate that is advertised by the lender. Interest rates are also affected by factors which can’t be controlled by the borrower or the lender, such as the actions of the Federal Reserve or the state of the economy. Because most people and families buy homes through a mortgage loan, the housing market is deeply affected by changes in current interest rates.

What Are Interest Rates and How Do They Work?

An interest rate is the rate at which someone can borrow money from a lender for a predetermined period of time. The interest rate will normally be a percent of the total amount borrowed, and will be paid each month, depending on the type of loan. For example, some loans require a larger payment towards the interest in the beginning, while the payment towards the principal is very low.

Interest rates on a mortgage loan can be of two kinds: fixed and adjustable. After being determined before the closing of the loan, fixed interest rates remain the same for the duration of the repayment period. Adjustable interest rates are normally fixed for a short period of time, after which they can increase or decrease, depending on many factors, such as the health of the economy.

How Do Interest Rates Affect the Housing Market?

Normally, low mortgage interest rates attract more home buyers. Paying less interest means that the overall mortgage loan value will be lower, so people will be saving money. When rates are low, home sales rise because more people can afford to take out low-cost loans. Home owners can refinance their mortgage, and try to take out a lower interest rate mortgage to pay for their home. Low interest rates result in a large demand for homes, so the home construction industry is also stimulated.

When interest rates are high, the demand for homes decreases because mortgage loans become more expensive, and most people can’t afford them anymore, don’t qualify, or simply choose to rent until interest rates go down again. High interest rates also affect home builders, as the demand for new homes also decreases.

Interest rates have fluctuated significantly throughout history, influenced by changes in local and global economy, wars, recessions and many other factors. The housing market will always have to gain or suffer from these fluctuations. Also, understanding how these fluctuations in interest rate affect the housing market can help investors make better decisions. Choosing between a fixed-rate or an adjustable-rate mortgage, and knowing when to refinance can make a huge difference in how much it will cost you to become a home owner, or how much profit you will make if you invest in real estate.

Top 10 Tips for Mortgage Modification Success

Top Ten Tips for Mortgage Modification Success- 150x150

Mortgage modification can be a saving grace for many people, but others are thoroughly disappointed when a seemingly sure thing is denied to them. Lenders may appear to render assistance to all of their customers, but statistics indicate that the cry of homeowners for mortgage modification has fell on deaf ears. However, if you start the process well-informed and a few steps ahead, you have a much better chance for your mortgage modification request to be successful.

Reasons for Denial of Mortgage Modification Requests

  • Ineligibility. The Federal National Mortgage Association (FNMA) cites several requirements for the eligibility of an applicant. One of them is that the loan should have originated before 1st January, 2009. The modification is allowed only once under the program. If it has been modified before, you are disqualified.
  • Insufficient documentation. FNMA provides a list of all the documents that you should present along with your application forms. This includes your detailed credit report, all of your income sources, and a fully signed IRS 4506-T as proof of income. If you fail to provide all of the documents you will not qualify.
  • Type of mortgage. Both fixed rate and adjustable mortgages qualify for modification but interest-only mortgages do not qualify. In an interest-only mortgage, you pay back the interest first within a given period of time after which you start paying the principal.
  • Level of mortgage expense on the first lien. The FNMA has placed a special cap on the level of mortgage expense, given the household income. If it is already below 31% of your total household income, you will not qualify.
  • Payment defaults. Some mortgagors are very strict with mortgage modifications. As a measure of ensuring that you will not land the firm in financial loss, they will look at your credit report to ensure that you have no default or missed payments. The presence of a late payment or missed payment in some cases will warrant a direct disqualification for mortgage modification.

Tips for Mortgage Modification Success

  1. Ask questions. Before striking a deal with the lender, know exactly what that mortgagor provides. There could be a misunderstanding in the deal that may lead to future problems. Mistakes can be avoided by asking questions to ensure clarity.
  2. Remain persistent. Many homeowners usually become frustrated when their mortgagor asks them to resubmit their documents once again. If you really need the mortgage modification, you should cooperate with the lender as much as possible and remain persistent throughout the process.
  3. Seek professional financial help. Are you an amateur in the mortgage modification process? If you are not mortgage savvy, it is better to seek professional help from a loan modification firm or an attorney. However, you should avoid revealing your private information such as credit card details to anyone except your lender. The firm or attorney should be approved by HUD. Do not pay any upfront fees.
  4. Know your lender. Knowing enough information about your selected mortgage modifier can help you to obtain a better modification. If you find out that the bank actually owns the loan then you stand a higher chance of enjoying more flexible terms. This you can do by directly asking the mortgagor or by visiting Fannie Mae and Freddie Mac online, then inputting your address to find out whether the loan is with Fannie Mae or Freddie Mac.
  5. Be very honest. Along with your application forms, the lender requires a significant amount of financial information about you. To streamline the process, give the lender all of the details that they require. Don’t fudge any numbers on the forms in order to make yourself eligible- that could catch up with you in the form of foreclosure. Some of the details that may be required of you include your monthly gross income, recent income tax return, savings, other assets, details of your first mortgage, account balances from your credit cards, minimum monthly payments due on all your credit cards and an explanation as to why your income has been reduced.
  6. Present an ideal financial hardship letter. This is a polite and detailed explanation about how you found yourself in a deep financial mess. The letter is very important because if your mortgage modification servicer is not convinced with your openness they will have questions as to how straightforward you will ever be. Do not leave any important point out. Be sure to include exact numbers and dates.
  7. Be realistic. Your job in the loan modification process ends once you submit all of the required paperwork. Then you will wait until you receive the interest rate offer. In case it is too high for you to repay, don’t sign the deal. Explain to the loan sales executive about the constraints on your budget so that you can manage repaying with relative ease. This is not desperation but realism.
  8. Document everything. Keep a record of everything discussed and determined each time you speak to a lender or receive some correspondence. The importance of having a track record of all these details is that you can use them to your defense when a foreclosure knocks at your door. You should also use only certified shipping companies so that some lenders won’t claim that they sent you some documents that you never received.
  9. Be flexible and patient. Don’t apply for a mortgage modification and be dead-set on how you expect the process to go. The whole process may take 30 to 90 days before approval. Even if you were told to wait for a call, if by the end of the agreed period there is no response, then you can courteously follow up to find out what the status is on the process. Patience pays at the end of the day.
  10. Proof of income. Lenders require all homeowners to provide proof of their income. This you should do not only by providing valid income documents but also a duly signed IRS Form 4506-T that allows the mortgage servicer to access your federal tax returns. In many institutions, this is the leading reason why many applicants are denied mortgage modifications. Learn more about the documentation process for mortgage loans.

Mortgage modification enables you to enjoy lower interest rates and manageable monthly repayments. If you have suffered a financial setback through injury, a natural disaster, divorce or any other misfortune, mortgage modification may provide the relief you are looking for to move forward positively with your finances.

How Much Home Can I Afford?

Your House

Just as a potential home buyer hopes to find a well-suited living space that satisfies their needs and lifestyle, their search for the funding source will be equally matched by a lender’s evaluation of their ability to repay the mortgage. While there are numerous qualifications to be met, the lender is going to focus attention on primary factors, such as credit history, their gross monthly income, and the cash resources available for the down payment. This all translates into what kind of house a borrower is able to afford, and the likelihood of qualifying is determined by the borrower’s ‘debt-to-income ratio’.

The Front-End Ratio

This formula is based on a calculation which encompasses the housing expense, or front-end ratio, combined with the total debt-to-income, or back-end ratio. The front-end portion is determined by how much of a borrower’s gross monthly pre-tax income can be applied to the mortgage payment. As a rule, this includes the principle, interest, real estate taxes and insurance, which must meet a ceiling of 28% of the gross monthly income figure. This can be found by multiplying a borrower’s yearly salary by .28, and dividing that result by 12. As an example, if a home buyer has a salary of $40,000, the equation is: $40,000 x .028 = $11,200, and, $11,200 divided by 12 months = $933.33, the maximum mortgage-related payment per month.

The Back-End Ratio

The back-end ratio is determined by compiling all the debt obligations of the borrower, including the mortgage, auto loans, and credit accounts. When totaled, this figure cannot exceed 36% of a borrower’s gross yearly pre-tax income. The formula would be stated as: gross yearly income x 0.36 / 12 = the maximum allowable debt-to-income ratio. Therefore, the lender’s equation would be: $40,000 (annual income) times 0.36 = $14,400, and $14,400 divided by 12 months = $1200 – the total amount of debt obligations per month. With these figures, a borrower can determine exactly how much house is financially feasible to purchase.

How Are Interest Rates Set?

interest ratesAfter pouring over the mortgage rates posted all over the internet, after shopping around to the local banks and mortgage brokers, after watching the economy plunge the housing market into free fall, any potential home-buyer must wonder who or what determines how the interest rates are set. The effect a credit score has on a loan approval almost seems secondary compared to understanding how the big ‘interest’ game is played, and how it ‘trickles down’ to the everyday consumer’s ability to find a decent place to live, and the means to afford it.

It turns out, the lender or broker has little to do with how the mortgage interest rates are determined. They simply control who finally gets a favorable nod, and on what terms. Mortgage interest rates are played out on a much bigger game board, and are primarily manipulated on what is known as the secondary market, where mortgages are bought and sold, much like a game of Monopoly.

Fannie, Freddie, and the Wizards of Wall Street

A few decades ago, the federal government sought to stabilize the mortgage lending process, and created two enormous mortgage investment entities called Fannie Mae and Freddie Mac. These monoliths, along with other mortgage investors, purchase the loans that the local lenders and brokers arrange, gather them into portfolios or wrap them up with other loans into things called mortgage backed securities. From there, these bundles are sold to Wall Street, mutual fund managers and other financial powerhouses, to be traded just like Treasury bonds, securities and other financial instruments. This process is what actually determines the interest rate a potential homeowner will pay to put a roof over their heads.

From that point, and just like the stock market, these securities are tied to the higher yields the investors demand when the economy is good, which pushes the local lenders to raise the local interest rates. When the markets take a dive, so do the interest rates, due to the higher demand from the investor side of the equation. And so it goes.

Down Payments

down-paymentBetween finding the perfect house to buy, searching for affordable home mortgage rates, deciding on a lender or broker, and making sure the credit scores are in good order, there is the down payment challenge for the potential home-buyer to factor into the financial formula. It is easily one of the most difficult of hurdles for the home-buyer to manage, and even more so for those in the lower range of income bracket, and those contemplating purchasing a home for the very first time. Luckily, many lenders are becoming more flexible in granting approval with smaller down payments.

Generally, lenders require a range between 5, 10, or 20% of the purchase price, with a few 0%-down loan programs available. If a borrower can offer funds in the 25 – 30% range, then lower credit scores can be less of a factor, along with income verification. If a borrower falls below these thresholds, the lender will more than likely request private mortgage insurance, or PMI, to cover the risk. The bottom line strategy is – the more money down, the lower the monthly payment, or, the more ‘house’ a borrower can consider buying.

In simple terms, and following the required 28% monthly payment-to-income ratio, and the 36% debt-to-income ratio, a benchmark monthly mortgage payment of $933 can be used as an example. With an interest rate of 7.5% applied to a 30 year fixed-rate loan, the total principle would be $133,435.45. By offering 10% down on the loan, the mortgage payment would cover a home costing $148,262.00. Offering 20% as a down payment would boost the ‘available’ home purchase price to $166,794.

With this in mind, it is also best if the borrower has the necessary down payment funds secured at least 60 days prior to beginning the application process. In addition, it is wise to forgo or postpone other cash outlays or credit applications, as well as making sure sufficient funds for the closing costs are on hand, and the credit scores have been reviewed and mistakes rectified for the best chances for lender approval.

Choose an Affordable Home

Just how much ‘house’ should a borrower purchase ?

choose an affordable homeJust as a potential home buyer hopes to find a well-suited living space and neighborhood environment that best satisfies their needs and lifestyle, their search for the funding source will be equally matched by a lender’s evaluation of their ability to repay the mortgage. While there are numerous qualifications and requirements to be met during the somewhat lengthy and often nerve-bending process, the lending institution is certainly going to focus their attention on some primary factors, such as credit history, a borrower’s gross monthly income, and the available cash resources accumulated for the down payment. These criteria all translate into what kind of house a borrower is able to ultimately afford, and the viability of a qualification begins by what is referred to as a ‘debt-to-income ratio’.

The Front-End Ratio

This formula is based on standard calculation which encompasses the housing expense, or front-end ratio, combined with the total debt-to-income, or back-end ratio. The front-end, or housing expense portion, is determined by how much of a borrower’s gross monthly pre-tax income can be applied to the monthly mortgage payment. As a rule, the monthly payment, which includes the principle amount of the loan, the mortgage interest rate, the real estate taxes, and homeowners insurance, must meet a ceiling of 28% of the gross monthly income figure. This can be self-determined by multiplying a borrower’s yearly salary by .28, and dividing that result by 12 ( months ). This figure equals the maximum housing expense ratio portion of the formula. As an example, if a prospective home buyer has a yearly salary of $40,000, the equation would be represented as follows: $40,000 x .028 = $11,200, and, $11,200 divided by 12 months = $933.33, the maximum mortgage-related payment per month.

The Back-End Ratio

The back-end ratio, or debt-to-income portion of the formula, is determined by compiling all of the debt obligations of the borrower, including the mortgage itself, any car loans, child support, credit accounts, and even student loans. When totaled, this figure represents a number that cannot exceed 36% of a borrower’s gross yearly pre-tax income. Again, the formula would be stated as: gross yearly income x 0.36 / 12 months = the maximum allowable debt-to-income ratio. Therefore, the lender is basing an evaluation on a figure that would look something like this: $40,000 ( annual income ) times 0.36 = $14,400, and $14400 divided by 12 months is $1200 – the total amount of debt repayment obligations per month. With these figures in hand, a prospective borrower can certainly get a sense of where the numbers fall in the lending qualification formula, and more effectively determine exactly how much house is financially feasible to purchase.