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.

Are You Applying for a Mortgage? These Things Might Ruin Your Chances of Approval!

Are You Applying for a Mortgage-These Things Might Ruin Your Chances of Approval- 150x150The initial cost of purchasing a house or an apartment can be very high. A 10 to 20 percent down payment plus several closing costs means that you will have to pay thousands of dollars before you can even move into your new home. But having this kind of money available won’t guarantee that your mortgage application will be approved. Lenders want to protect themselves from default, so they will take the necessary precautions.

This means that they will take a close look at your financial situation, which includes your credit score, income and savings. They will also look into things like recent debt, your marital status and your job situation. Getting approved for a mortgage can be pretty difficult if your lender encounters red flags when checking out your finances and parts of your personal life. This article will take a look at what lenders may consider reasons for not approving your mortgage loan and what you can do to get out of that situation.

Financial Situation

First of all, lenders look at your credit score. People usually think that credit scores only affect the interest rate that they will receive or the down payment that they will have to make. Low credit scores can also ruin your chances of getting approved for a mortgage. Lenders use credit scores to determine how big of a default risk you are, so a low credit score will probably result in being denied for a mortgage loan. Best case scenario, they are willing to give you a mortgage loan, but at much higher interest rates, and with the requirement that you make a down payment that is larger than 20 percent.

Another aspect of your financial life that lenders look at is your income. Lender requirements usually state that your housing expenses not exceed 28 percent of your gross monthly income. The good news is, besides your salary, you can count other sources of money as income. Bonuses and commissions, social security or veteran’s benefits, child support, or workman’s compensation are all considered income and can help you get a loan if your monthly salary is too low.

Debt

Lenders will want to know how much debt you have, and how it relates to your income. Generally, lenders require that your housing debt plus other debt not exceed 43 percent of your income. New debt is especially damaging to your chances of being approved for a mortgage, because the lender will consider that you won’t be able to pay off the debt without encountering problems along the way. Making a major purchase by taking out a loan or co-signing for a family member before applying for a mortgage loan should be avoided in order to increase your chances of approval.

Divorce

Applying for a mortgage loan while you are divorcing your spouse can make things difficult, or even result in the rejection of the mortgage application. Lenders want to avoid being caught in the middle of a battle over marital property, or giving out a loan to a family where one of the members will stop paying for it. Not mentioning to your lender that you are currently dealing with divorce is a bad idea, as they will most likely find out on their own and reject your application.

Job Situation

Borrowers who have kept a steady job for at least two years before applying for a mortgage are seen as having a smaller risk of default by lenders. The risk exists, but recently changing jobs doesn’t mean that your application will be rejected. Finding a new job in the same field as your old one, but for a higher salary won’t cause you any problems when applying for a mortgage loan. If you plan on switching jobs, try to wait until your mortgage loan application is approved. Also, if you are between jobs, you will probably have to find a job and keep it for at least two years before a lender will consider granting you a mortgage loan.

Lawsuits

Being sued or even suing someone can interfere with being approved for a mortgage loan. If you lose, you will either have to pay a settlement or have to pay some large attorney fees, making you appear unable to pay your mortgage in the eyes of a lender. Just like when divorcing, you should be truthful when the lender asks you if you are involved in any lawsuits.

There are plenty of things that can ruin your chances of being approved for a mortgage loan, but, with the proper research and knowledge, you will be able to analyze all these problems and resolve them. Even if it takes a couple of years, you should start taking care of anything that might interfere with your loan application approval.

 

 

 

Assessing Your Current Financial Situation: Are You Ready for a Home?

Assessing Your Current Financial Situation-Are You Ready for a Home- 150x150Buying a home involves more than just affording the down payment and closing costs. Your lender needs assurances that you will be able to pay your mortgage on time each month and that you won’t default in the future. Assessing your current financial situation will not only help you determine if your lender will approve your mortgage loan, but will also help you find out if you are ready to buy a home. Being a home owner has many benefits, but it is also requires sacrifices and it is very expensive. If you are not careful, you might have an unpleasant surprise when your lender denies your application or, even worse, you realize that you can’t actually afford to own a home after you have made the down payment.

Your financial situation involves more than just having some money saved up when thinking of becoming a home owner. Your credit score, your income, the assets that you own, and your current debt are all very important factors of your financial situation. These factors can decide if you will receive the mortgage loan and can also help you decide if this is the perfect time to buy a home, or wait a while longer.

Your Credit Score

Your credit score will help your lender determine how big of a default risk you are. Based on your score, they will decide whether to give you the mortgage loan or not. Your interest rate will be largely dependent on what range your credit score falls in. Those attractive interest rates that lenders advertise are generally reserved for those with perfect credit scores. Perfect credit scores are obtained over a longer period of time, and are affected by factors such as the punctuality of your payments, your total debt related to the total credit available, and the types of credit that you are using. High credit scores mean lower interest rates, which save you thousands or more in the long run.

Your Income

Knowing how much you own before and after taxes is very important when you assess your current financial situation. Your lender will also want to see documents that show how much you make each month in order to find out if you can afford a mortgage. If you are self-employed, you will more than likely have to show additional documentation that proves your income. It is always a great idea to have all of the paperwork completed before applying for the mortgage just to speed things up a little.

Your Assets

Another factor that must be taken into consideration when assessing your current financial situation is the value of all your assets. Your savings, investments, and tangible property are all considered assets. It might be a bit difficult to determine how much each asset is worth, but it is recommended to underestimate an asset’s value rather than to overestimate it.

Your Debt

Credit cards, mortgages, and other loans, like car loans or school tuition, are all debt that must be considered when assessing your financial situation. Your lender will also be interested in this information, because typically lenders require a certain ratio between your income and debt. If your total debt, including your new mortgage, is more than 40 percent of your income, you might encounter problems when applying for a mortgage loan.

You can only find out if you are ready for a home if you assess your current financial situation. Not doing so can result in your inability to secure or pay off your mortgage loan, which will make your life much harder. Spending time and money only to be refused by your lender or buying a home that you can’t afford can be avoided by doing a little research into your financial situation and finding out if you are truly ready to become a home owner.

What You Ought To Know About Mortgage Underwriting

What You Ought To Know About Mortgage Underwriting- 150x150When buying a home, the home buyer is going to pay hundreds of thousands of dollars over the life of the loan, while the lender is responsible with collecting that money. In order to protect himself, the lender has to closely examine the borrower’s ability to repay the loan. This is done through a process called mortgage underwriting. This is the process that will determine if the home buyer will receive the mortgage loan, and how easy it will be for the applicant to be granted the mortgage loan. Applicants who are regarded as low-risk will face little to no problems, while those regarded as higher-risk will have to provide additional information about certain areas of their financial situations. High-risk borrowers also have a high chance of being denied for a mortgage loan.

Mortgage underwriters are charged with finding any issues that the applicant may have now or in the future and carefully determine how much of a risk they are. Mortgage underwriting will take a close look at the home buyer’s debt-to-income ratio, income and credit score. These are the most important aspects of your financial situation, and the factors that will decide if you will be granted the mortgage loan or not. Mortgage underwriters also look at the applicant’s age, savings accounts, investments and other things.

Debt-to-Income Ratio

The debt-to-income ratio represents how much debt someone has versus their income. Having too much debt when compared to your income level raises a red flag for mortgage underwriters and can jeopardize your chances of receiving a mortgage loan and becoming a home owner. Lenders who give out mortgage loans that are not backed by government agencies such as the Federal Housing Administration or the U.S. Department of Veterans Affairs usually require borrowers to spend 30 percent or less of their monthly income on the mortgage loan. Also, the total percentage of your monthly income that is spent on all your debt should be less than 40 percent. Mortgage loans are sometimes granted to applicants with higher ratios, but it is recommended that the amount spent on debt each month to be as small as possible, in order to increase your chances of being approved for a mortgage.

Income

In order to verify your income, you will most likely need recent pay stubs, W-2 forms, and other documents. Failure to present these documents will usually result in your mortgage application being denied. Also, remember that lying about your income is considered criminal fraud and will attract problems that are much more serious than being denied for a mortgage loan. Providing proof of income may be harder for those who are self-employed, and mortgage underwriters will probably not grant the loan until this proof is provided.

Credit Score

Your credit score keeps track of your record on repaying borrowed money, so your lenders can figure out if you are a high or low default risk. A low credit score means that you have missed payments or even stopped paying your debt in the past, and will probably attract a mortgage application disapproval. High credit scores mean that you are a trustworthy borrower, and a low default risk, so you shouldn’t encounter any issues during the underwriting process.

Mortgage underwriting is necessary because the lender needs to protect himself from losing money when borrowers who can’t afford a mortgage apply for one. Understanding this process will make it easier for you to know what’s requested of you when applying for a mortgage, and what you can do to improve your financial situation in order to increase your chances of being approved for a mortgage loan.

What You Need to Know About Stated Income/Stated Asset Loans

What You Need to Know About Stated Income-Stated Asset Loans- 150x150Borrowers with good financial situations and who make all their payments on time are usually regarded as low risk borrowers and will be in good standing with their lender. This type of borrower can take out a mortgage loan without having to provide too much documentation regarding their income. Usually, the lender will trust that what the borrower declares as income is true and make a loan offer. Stated income loans are designed for those who have enough money and income to afford a mortgage, but don’t meet the conventional underwriting standards.

Normally, in order to get a mortgage loan, the borrower has to provide full documentation, which includes income proof for the previous 2 years, usually done by presenting a W-2 form or tax returns. Self-employed mortgage borrowers and people with full time jobs who have just received a large pay increase usually aren’t able to come up with these documents, but they can afford the mortgage.

Can Someone Simply Lie About Their Income?

Some lenders choose not to check the income of some borrowers, but this usually only happens for borrowers who have very good financial situations and a good relationship with the lender. Some lenders ask borrowers to allow them, by executing a Form 4506, to check their tax returns for the last 2 years through the Internal Revenue Service. Lenders don’t normally go as far as actually checking tax returns, but the fact that they can at any time should persuade the borrowers to report their income truthfully.

Even if they don’t check a borrower’s actual income, all lenders check the source of the income. They also require self-employed borrowers, as well as borrowers who work full time jobs, to be in the same business or be employees in the same field for at least two years before applying for a stated income/stated asset loan. The borrower’s income must also be close to incomes earned in the same line of work as he or she is involved in.

Things to Remember Before Considering a Stated Income/Stated Asset Loan

Stated income/stated asset loans are not for everyone, and there are a few things that you need to take into consideration before you decide to take out this type of loan. First of all, not all stated income loans are the same and have the same requirements. Requirements for this type of loan vary from lender to lender, and you might not qualify for all the offers. Second, stated income loans may cost you more than a traditional loan because they are riskier for lenders.

Another thing that you need to keep in mind is that, while stated income/stated asset loans take a shorter while to be processed, this shouldn’t be the only reason why you should choose this type of loan. Even if a conventional mortgage loan takes longer to process, it might be a better and even cheaper choice.

Stated income/stated asset loans may be a great choice for some borrowers, especially if they don’t meet the requirements for full documentation for conventional mortgage loans, but are able to easily afford a mortgage loan. All borrowers who consider taking out a stated income/stated asset loan, should first do a little research to make sure that this type of loan is their best choice, and check out other options, which may actually prove to be more beneficial.

Are You a Twenty-Something Wanting to Buy a Home? Here’s What to Know

Twenty Something- 150x150Low interest rates and home prices have always attracted many young first time home buyers. Especially now, after the recent housing market crash, people who are looking to buy a home also have the option of buying foreclosed and distressed properties, which can still be bought for much cheaper than regular homes. But the housing market crash has also caused people to be more reticent when it comes to buying a home. First time home buyers are being especially careful before making such a large purchase, who may not be as stable financially or as sure as to how long they will be living in one location.

Home ownership when you are in your twenties, if you can afford it, can also be very beneficial in the long run. You will avoid wasting money on renting a place with no potential for equity and will also have much longer to pay off your mortgage before your retirement years. You will also build equity in your home when home prices are low, an advantage that you won’t get if you are renting. However, many young home buyers are afraid that they can’t qualify for a mortgage loan, or at least one that won’t have a very high cost. Being a twenty-something home buyer is the same as buying a home at any age. The most important factors will be your credit score, your income, and the size of your down payment. The actual problem that you might encounter is that you might be a bit young to have a perfect credit score, a large income, or enough money saved up to make a large down payment, but that can happen at any age. In this article, we will take a closer look at each of these three factors and how they can affect young home buyers.

Your Credit Score

A young person will probably be worried that he or she didn’t have enough time to build a good credit score, and the lenders will automatically reject their mortgage loan application. In reality, your credit score will probably be better than you think, and easy to boost. You are in your twenties, so you shouldn’t have any large debt or dark spots on your credit report. Also, if you don’t have credit, you can establish it fairly quickly, in a couple of years. Just having a credit card that you pay on time can help your credit score reach the “perfect” range very easily.

Because you are young and maybe haven’t found a stable job, you may have some unpaid bills that you think will affect your credit score. The most important thing is to pay them as soon as possible, but, unless they are referred to collection, they won’t affect your credit score in any way. You will probably have to pay a late fee if you are late on a credit card payment, but as long as you make the payment within 30 days, your credit score won’t suffer.

Your Income

Lenders have to make sure that your income is large enough to accommodate your monthly mortgage payment, which also includes the obligatory homeowners insurance and property taxes. Lenders usually require that your monthly mortgage payment is less than 30 percent of your monthly income. Also, the total money that you owe each month, including debt such as student loans, should not be higher than 43 percent, or even less for some lenders.

Lenders will also require that you have a stable job, meaning that you have held the same job in the same organization for at least two years. Self-employed home buyers will have to provide tax returns and other records for the past two years in order to qualify for a mortgage.

Your Down Payment

Your credit score will affect how much you will have to put down when buying a home. Typically, if you have a very good credit score, you will only have to make a 10 percent down payment. But you should also keep in mind that, if you put less than 20 percent down, you will have to pay a Private Mortgage Insurance (PMI), which will make your mortgage loan more expensive overall.

An alternative can be a Federal Housing Administration (FHA) mortgage loan, which require a much lower down payment, sometimes as little as 3.5 percent. FHA loans require a larger insurance payment, but also have lower interest rates, making them a good alternative to conventional loans. Active or retired military personnel can apply for a U.S. Department of Veterans Affairs (VA) mortgage loan, which requires no down payment. People who wish to live in a rural area can apply for a mortgage loan backed by the U.S. Department of Agriculture (USDA), which has many benefits over a conventional loan, but a longer waiting period.

Buying a home in your twenties is not harder than buying a home at any age, but it may be harder to qualify for a mortgage. Because you are just starting out in life, usually fresh out of college and with some debt, you might find it more difficult to come up with the large down payment or have a good enough income. But if you can do it, buying a home when you are twenty-something will be more beneficial than waiting until you are in your thirties or forties.

Do You Make These Mistakes? Don’t Kill Your Mortgage Refinance!

Do You Make These Mistakes- Don't Kill Your Mortgage Refinance-150x150Making lower payments on your mortgage is a great way to save money and make your life easier. The most common way in which you can reduce your monthly mortgage payment is by refinancing. This can also be the most beneficial way, which can save you a significant amount of money. But going from saving money to losing money is really easy when it comes to refinancing.

Refinancing might seem like a great idea at first glance, but it is not for everyone. There are several factors that have an influence on whether refinancing is good or bad for your situation. When refinancing, many home owners often make mistakes that, even if they won’t create problems in the beginning, will end up costing them in the long run. Refinancing is more complicated than it was years ago- the requirements are stricter, more paperwork is needed- so it’s easy for a borrower to make a mistake.

Here are the most common mistakes that borrowers make when refinancing, to help you avoid making them when you decide to refinance.

Convincing Yourself That Your Home is Worth More Than It Is

Being unrealistic about the value of your home is a sure way of ruining a refinance. Many areas have seen a decline in home prices, so your home’s price has probably fallen too. Most refinances today are denied because the home is appraised too low, so the lender won’t give out loans that are larger than the appraised value.

Not Shopping Around

You might have a great relationship with your current lender, and he might give you a special deal on your refinance, but it never hurts to shop around for an even better rate. Lenders can also reduce or even waive certain closing costs, which will also influence how much you will be spending on refinancing. Even a small difference in interest rate can mean a lot of money over time, so it’s important to look around, see which lender can offer you the best deal.

Not Taking Closing Costs into Consideration

One of the biggest reasons many home owners choose not to refinance are the high closing costs. The closing costs are one of the main factors that should be taken into account when deciding whether to refinance or not. Interest rates offered by most lenders will probably look very attractive, but you can end up losing money if you don’t take closing fees into account.

Letting Your Credit Score Decrease

Even if you find a very attractive refinancing rate and a lender who is willing to waive some of the closing costs, refinancing with a low credit score will most likely result in a waste of time. Not having a good credit score will attract high interest rate, or even the lender’s refusal to give you a new loan.

Creating New Debt During the Refinance

New credit cards or loans can seriously hurt your chances of being able to refinance. Additionally, you’ll have to provide even more documentation to justify the new debt. It’s best to hold off acquiring new debt until the refinancing process is over and your new loan is granted. It’s always best to keep new debt low, even after refinancing, and talk to your lender about what the implications are.

Refinancing Multiple Times

Refinancing repeatedly in a short period of time will not save you money. Each time you refinance, not only do you have to pay some hefty closing costs, but you are also resetting your mortgage, meaning that over time you will pay significantly more in interest. You can also end up having to still make mortgage payments during your retirement years.

Your decision to refinance should not be affected only by the low interest rates. Always take into consideration the closing costs when trying to figure out if refinancing is the right step for you. Not paying attention to all of the details can become very expensive with refinancing. All mistakes can be avoided by doing a little research, making refinancing an easier process, which will truly save you some money.

10% Down Payments are Back!

10 Percent Down Payments are Back-150x150Becoming a home owner is many people’s dream, and at one point in their life, it will probably become reality. But there are several factors that need to be considered when buying a home, most of them related to how much you will be spending on your loan. Finding a home is the easy part, and you probably won’t encounter too many issues there. But making sure that you are not overpaying is a little harder, and will require some research.

Of course, your financial situation may require you to make some compromises, such as having lower monthly payments at the cost of paying more overall on your mortgage loan. Another aspect of your loan in which you can compromise is the size of your down payment. For years, the majority of lenders have required borrowers to make a 20 percent down payment, but it looks like 10 percent down payments are back, and they are an attractive alternative to many home buyers.

Advantages of Making a 10% Down Payment

Depending on how much the home that you are buying is worth, a regular 20 percent down payment can mean a large amount of money, which many home buyers are not able to afford. For some, it might take years to come up with the 20 percent down payment, so the 10 percent alternative is a good option. Besides the down payment, home buyers shouldn’t forget about other costs associated with taking out a mortgage loan, such as closing costs and insurance. Closing costs can be very high, making the 10 percent down payment even more attractive, compared with the hefty 20 percent down payment.

Another advantage of not having to save for a long time in order to come up with the 10 percent down payment is that, when saving money for a few years, there is always a chance that home prices may rise, making it impossible for you to buy a home with the amount of money that you have saved up. You should also take inflation into account- 20 percent of the cost of the home right now will, most likely, not represent 20 percent of the price of a home a few years from now.

Even if you can afford the 20 percent down payment, you can choose to only put down 10 percent and use the other 10 to finance repairs or improvements to your new home. That extra 10 percent can also be used for investing in stocks or mutual funds, but this is only recommended for those who have experience in these types of home investments.

Disadvantages of Making a 10% Down Payment

One large disadvantage to making a 10 percent down payment is that qualifying for a lower down payment is fairly difficult. Lenders require your debt to be less than 45 percent of your income, and your credit score to be above 700. Many of these restrictions apply to 20 percent down payments, as well, so qualifying for a 10 percent down payment won’t be too difficult if your only problem was coming up with the 20 percent required by all lenders until now.

Another disadvantage is that, if home prices go down in the future, you could end up with a home that is worth less than what is owed on the mortgage. If this happens, you may not be able to sell your home, which may lead to other serious issues. 10 percent down payments can also be problematic if you have little equity in your home and decide to sell. Your loan value plus selling costs can be higher than the sale price, resulting in you losing money.

10 percent down payments are back, and that is good news for home buyers with good financial situations, but who can’t or choose not to make a 20 percent down payment. But before deciding how much of a down payment to make on your home, you should calculate how much money you would save or lose with each option. If the down payment size is the only thing standing between you and home ownership, then go for it, but you shouldn’t choose to make a 10 percent down payment just because you can, without weighing in on both the advantages and disadvantages.

Student Loan Debt? You Can Still Buy a Home, No Problem!

Student Loan Debt-You Can Still Buy a Home No Problem- 150x150Having children and owning your own home is the classic American dream. Nowadays, there are plenty of obstacles that will stand between you and home ownership, one of the biggest being your student loan. Many student loans are comparable with the cost of a modest home, making it pretty difficult for a recent college graduate to become a home owner. Fortunately, there are some things that the young home buyer, who has recently received his or her degree, can do in order to buy a home before paying off that hefty student loan.

How Do Lenders Determine If You Qualify for a Mortgage?

Most lenders usually look no further than a mortgage applicant’s debt-to-income ratio. Before the recent economic recession, lenders were more lenient with home buyers who had student loans, but the housing market crisis has caused them to tighten debt-to-income requirements, in order to make sure that borrowers are able to pay back their mortgage loans. This, of course, was bad news for most recent college graduates, because having a good debt-to-income ratio with a student loan still being repaid is hard enough as it is.

When analyzing a borrower’s debt-to-income ratio to determine if they qualify for a mortgage loan, lenders typically review the front-end and the back-end debt ratios. The front-end ratio is related to the home buyer’s housing expenses, such as the principal, interest and tax, while the back-end ratio is related to other long-term debt that the borrower might have.

The student debt will, of course, be taken into account, and will affect the borrower in different ways depending on each person’s situation. For example, a single person with a student debt will have little chance of receiving a mortgage loan, a household with two debtors might encounter some difficulty when applying for a mortgage loan, while a household where only one person is in debt will be able to get a mortgage loan much easier.

Becoming a Home Owner with Student Loan Debt

Student life is very different than what you will experience after graduating college. A student’s life usually revolves around studying, mid-terms and parties, so when it is all over, real life might come as a shock, especially because you have to repay the money that you borrowed to pay for your tuition. Big student loans are very burdensome, and entry level jobs often pay just enough for you to be able to afford repaying your debt. Student loans can also have an impact on your credit score, so buying a home becomes that much harder. But there’s some good news, as well. By following these following steps, you can stop student loans from being such a burden, and get yourself on the right path to home ownership.

  • Minimize your student loans. Student loans are designed to help you pay for your tuition and receive the proper education that will later help you secure a good job. Student loans should not be used to pay for vacations or the cost of going out to restaurants or movies. Besides carefully planning your budget, you can also reduce your student loan by working part time or applying for financial aid. Don’t be fooled into believing that you will be able to easily pay off your debt after graduating, and that you can have fun spending a lot of money during college. Before you know it, the fun times are over, and you will find yourself having to face the harsh realities of life, so carefully budgeting and cutting unnecessary expenses is a sure way of making your student loan smaller.
  • Reduce your student loan debt. You may encounter some difficulty in finding a good job right after graduating college, so you should know that you have some options regarding your student loan. One option would be to call your lender and try negotiating your loan or your interest rate. Another option would be to extend your repayments, or even put a hold on your loan payments for a while, until your financial situation improves. Of course, these options will most likely result in having to pay a larger interest rate, so a proper analysis of your budget and future plans is required.
  • Avoid creating new debt. Taking out a new loan or applying for a new credit card while you are planning to buy a home will severely impact your chances of receiving a mortgage loan.
  • Keep making payments on your student loan. The only way to eliminate your debt is by paying it off, month by month, as agreed. Make paying off your student loan a priority and pay even more than the minimum payment required if you can afford it.
  • Find a co-signer for the mortgage loan. Having a co-signer in your situation will help you qualify for a mortgage loan much easier. One of your parents or a relative can co-sign your mortgage loan, which will make them responsible in case you are not able to make your monthly payments anymore.

Buying a home while still paying off your student loan is not as easy as it used to be, but it’s far from impossible. By simply making regular payments on your student loan, you are already at an advantage in the eyes of most lenders. However, before applying for a mortgage you should sit down and have a serious look at your budget and future outlook. Make sure that you will be able to pay off both student and mortgage loans at the same time, as missing only a few payments can have a deep negative impact on your life, and ruin your financial situation for years to come.

 

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.