How Much House You Can Afford

There are a number of factors that can contribute to the affordability of a house and, as a potential homebuyer, it's important that you know what type of mortgage payments are within your budget.

Debt-To-Income Ratio

As a homebuyer, your first consideration will be the amount of your monthly mortgage payments.  If you owe a lot of debt, lenders may consider you to be a high credit risk, which makes debt-to-income ratio a leading factor in determining how much of a house you can afford.

Most lenders will discount any loans that you will have paid off within one year when determining how much of a home you can afford.  As a general rule, your mortgage payment should not exceed 25-30 percent of your monthly take-home pay.

Loan Term

Although you will end up paying more interest in the long run, you will find that you can afford a more expensive house if you request a loan term of 25-30 years, compared to a shorter term of 15 years.

Interest Rates

When you look at an interest rate, all you see is a number.  Hopefully, it's a single digit that's comparable with current market rates.  Most homebuyers already know that their interest rate affects their monthly payment which, in turn, is determined by the borrower's income.  Lower interest rates mean that you can afford a larger principal loan amount, which means a more expensive house.

Credit History

Because your past credit history will play a large role in determining your interest rates, it will also impact the affordability of a house.  For instance, a buyer who pays six percent interest will save a considerable amount of money over a buyer who pays eight percent interest on their home loan.  It may not seem like much now but, when averaged over time, the savings could be tremendous.

Down Payment Amount

Believe it or not, the amount of your down payment will not only show the lender how serious you are about buying a home, but it will also affect your ability to afford a particular house.  For instance, if you were to qualify for a home loan of $200,000, but your dream home was currently listed for $250,000, a down payment in the amount of $50,000 would get you into the home.

The above scenario is just an example, but it does show how a down payment can affect the price of the home that you are able to afford.  Some lenders may only require a five percent down payment, but you are free to pay as much above that as you wish.  A larger down payment can also reduce the principal loan amount, which thereby reduces the monthly mortgage payments.

How Much Cash Will You Need To Close?

For first time buyers, the amount of money that is needed to seal the deal can often come as a bit of a shock.  Known as the closing costs of the deal, this amount of money involves a number of different factors that can add up to several thousand dollars out of pocket for the buyer.  You should be prepared ahead of time to pay this amount-or find alternative ways to take care of them.

What Things Fall Under Closing Costs?

Some of the things you will commonly see included in closing costs are a number of fees and types of insurance.  First of all, there are origination fees on the loan, which are usually a percentage of the amount financed.  You will also see an appraisal fee and a credit report fee, both of which the buyer is usually responsible for.  There are also fees for the home inspection and other possible fees such as bank processing fees and flood certification.

You will also have to pay for the homeowner's insurance policy on the home for the first year in order to close, and for title insurance.  You may also have to pay property taxes on the home.

How Much Will It Be?

All of these costs are so varied that there is no way to guess at them.  They are determined in some cases as a percentage of the loan amount, and in other cases based on the home itself, such as with homeowner's insurance.  In most cases, closing costs are thousands of dollars.

You should be provided with an estimate of the closing costs ahead of time so that you aren't shocked with the amount at closing.

Ways To Pay

Of course, you can opt to pay all of the closing costs out of pocket in cash, but there are other options as well.  Many people choose to roll some or all of the closing costs into the mortgage itself, raising the monthly payment slightly but avoiding the need for a large amount of cash.  In some cases, you can also get the seller to pay some of the closing costs, but this will need to be agreed upon ahead of time.

Closing costs are a part of every loan and involve paying fees for the many services required to close on a loan.  Be prepared ahead of time, and you won't find yourself surprised by the amount that is due.

How Much Can You Afford To Finance?

One of the hardest calls to make when it comes to buying a home is how much you want to spend.  The larger the mortgage you take out, the bigger the payments will be.  Of course, there is more to the cost than simply the amount of the mortgage, as interest plays a big role as well.  How much can you afford to finance?  Consider these important factors.

How Is Your Credit?

If you have great credit you are likely to qualify for the lowest interest rates.  This means that you will be able to take out a larger loan, since the same monthly payment will get you more.  More of the money you spend each month goes to principal, meaning you will also pay it off more quickly.

People with credit problems will find that a larger amount of their monthly payment has to go to interest since they will get higher rates.  This means that the amount you can afford to finance is actually lower.

Look At Other Expenses

Take a look at all of your monthly payments and debts that need to be paid off.  Try to be realistic about what you can really afford to pay.  While a mortgage company may qualify you for a larger loan, that doesn't mean you can afford it in reality.  Take into consideration your lifestyle and the extra things on which you like to spend money.  Are you willing to give them up to pay a bigger mortgage?

The items you pay for monthly may be static in some ways and may fluctuate in other ways.  You need to have a realistic idea of what you spend each month on average to be able to determine what you can afford to finance for your mortgage.

Don't Forget Closing, Taxes, And Insurance

When calculating a monthly payment, don't forget to add in your homeowner's insurance and your property taxes.  Once these are added in, you might want to consider financing a smaller amount in order to get the monthly payment down to a manageable amount.  Once these two are added in, it can push your payment above your comfort level.

You will also be paying closing costs that are in some part based on the amount financed.  The more you finance, the larger these fees are likely to be.  It's important to remember this when you consider how much you can actually afford to finance on your new home.

Getting A Second Mortgage

Second mortgages are not as common as they once were, and getting one is not as easy as it used to be, but even with the recent financial pressures that many of us are facing in this economy, there are still a number of options that can allow you to get one.  Whether it's the ability to use the existing equity of your home to help you get through a tough time, or to finance home improvements, a second mortgage in some cases can be the best financial option.

What Is A Second Mortgage?

While there are still a number of choices for getting a second mortgage, it is usually possible only when you have existing equity in your home.  A second mortgage differs from refinancing your home in a few ways.  The most important thing to remember is the 80% rule, which affects the amount that you can borrow on a second mortgage, and will likely be less than if you refinanced.  For example, if you own a $200,000 home and still owe $100,000, the 80% rule means that you can borrow up to 80% of the value of your home, minus the outstanding amount.  So in this case, 80% of $200,000 is $160,000. Subtract from this what you still

owe-$100, 000. This equals $60,000, which would be the maximum amount you could borrow. The second mortgage on paper becomes a lien against your home.

Is A Second Mortgage Right For You?

In general, and especially in this economy, a second mortgage can often be obtained at a lower interest rate than refinancing, and there are no closing costs associated with this type of borrowing.  There are some restrictions, however, on what kind of expenses can be covered with a second mortgage.  Lenders usually provide second mortgages for costs associated with home improvements and renovations, as these expenses will increase the value of your home.  They also will consider a second mortgage for emergency medical expenses, to fund your child's education, or for debt consolidation if it is financially reasonable.

In general, a second mortgage may be the right choice for your particular financial situation and can be a smart way to fund much needed home improvements. Remember, it is always important to go to a few lenders to get the best offer possible, and to be sure you are only borrowing from a reputable and established institution.

Fixed Mortgage Vs. Variable Rates: Which Is Right For You?

With all the financial decisions that need to be made when purchasing a home, choosing the options that make the best sense for you can seem overwhelming.  Given the uncertainty of interest rates and the security of lenders, deciding what type of mortgage to choose and from whom to borrow can be a difficult and time-consuming task.  One of the most important decisions is what type of mortgage to choose.  The choice between a fixed rate and variable rate mortgage can be an intimidating task if you are not armed with the facts, so here are a few things to consider before making a decision.

What Is Your Current Financial Situation?

One of the most important considerations to take into account before choosing a fixed rate or variable rate mortgage is knowing your current, short-term, and long-term financial outlook.  Historically, those who choose a variable rate mortgage end up on the winning end of the deal.  Since rates fluctuate with the economy, and fixed rates are in most cases higher than variable rates (depending on when you took out your mortgage), the saving in the long term can be quite considerable.  If you are in a current financial situation in which your budget cannot handle the potential ups and downs of a variable rate, and a regular monthly payment makes more sense, then a fixed rate is probably a better choice.

What Is Your Long-Term Financial Outlook?

Another decision to make when selecting a loan is the amortization period and the length of your current mortgage interest rate agreement.  If your current financial outlook is very similar to your long-term financial outlook, then you may want to consider a longer term, variable rate loan.  If, however, you are likely to have a considerable change in your income through expected promotion, retirement, or one income being lost, then choosing a shorter term, fixed rate may be the better choice.

Regardless of your financial situation, it is always important to get the advice of a qualified financial advisor, and ensure that you get your mortgage through an established and reputable lender.

First Time Buyer Loan Tips

For first time buyers, the mortgage loan process can seem complex and confusing.  On top of everything else, you need to figure out interest rates, loan terms, fixed versus adjustable rate mortgages, and more.  In order to simplify and streamline the process, there are a few things you should look into before you apply for a home loan.

Be In The Know

It's a good idea to get a copy of your credit report before you start applying for loans.  There is nothing like getting yourself all ready to go house hunting and finding out you won't qualify for a mortgage.  While knowing your credit score won't tell you for sure if you will get a loan, it can prepare you for what you will be told when you sit down with a mortgage professional.  There are plenty of ways to get your hands on a free copy of your credit report, and knowing your credit score will help you know what sort of loan you might qualify for-or if you should wait and improve your credit before you apply.

Look Into Special Programs

There are a number of government programs for first time home buyers that you should be aware of before you start applying for loans.  You might qualify for assistance with your down payment or for a lower down payment on your loan.  This can make a big difference in the amount you can afford for your first home purchase.  Take advantage of the first time buyer perks that are out there.

Expect Out Of Pocket Expenses

You will need to have some cash in the bank before you can buy a home, and many first time home buyers are surprised at the amount.  There are things like earnest money, closing costs, and more to consider when you apply for a loan-that mortgage isn't the only cost of buying.  Before you go in to apply, be sure you have some extra cash on hand.

When it comes to buying your first home, it can be a very exciting as well as a nerve-wracking time.  By doing your research and preparing yourself for the process, you can ensure it goes more smoothly and you don't run into any nasty surprises.  Once you get that loan ready, you can start the fun part-searching for your first home!

Finding Your Credit Rating

Finding your credit rating can be an intimidating task, but for anyone hoping to purchase a home it is a necessary step.  Your credit rating has a huge effect on the process of purchasing a home, from the types of lenders you will approach, to the type of loan you will get, to the interest rate you will be offered.  So how can you find your credit rating, and how do you evaluate it?

Finding Your Credit Score

There are three major credit companies in the United States that offer you free access to your credit score-Experian, TransUnion, and Equifax.  These companies can give you a detailed breakdown of your credit situation; however, don't assume that each report will be identical.  Since these reports are free, it is in your best interest to get all three to be sure that you are getting the complete picture. 

Understanding Your Credit Score

When obtaining your credit report be sure that you request a consumer report.  These reports are simplified and designed for the average consumer, and are less confusing than the reports which are sent to lenders.  Your credit report will likely contain four sections, including personal information, credit history, public records, and inquiries.

Personal Information-When looking over the documents, first be sure that your personal information is accurate.  There may be minor spelling mistakes in your name or address, for example, or information about previous loans from old addresses.  Overall the information should be accurate, and contain no information which does not pertain to you, or looks as if it might be fraudulent.

Credit History-The second section of the report is the most important.  This will include information about the credit accounts you hold with institutions that report to that particular agency.  It should include the account numbers, the name of the creditor, the amount of the loan, the type, the rate, the outstanding amount, and the amount of any fixed payments you make.  It will also include information about any credit accounts you may hold with other people.  While each report may not be complete, it is important that what is included be accurate.

Public Records-This is the section that you prefer to be blank.  It includes reports on such things as bankruptcies, judgments, and tax liens.  Again, it is important that you ensure that this section is accurate.

Inquiries-This section includes information about any credit applications you have made or offers you have received.  Overall, this section is usually ignored by potential lenders, but it is important to check it for accuracy.

Finding The Best Fit For Your Mortgage

If you are in the market for a new home, or are looking to refinance your mortgage, there are an ever increasing number of lending options that exist for you as a homeowner.  Here are some of the potential lenders you can choose from to get your mortgage, as well as some of the pros and cons for each choice.

Mortgage Brokers

A huge number of real estate loans are made through mortgage brokers, and as they are essentially a middle-person between you and a lender, choosing a broker can save you time in shopping around for the best fit.  Be sure to ask about the variety of products offered by a specific broker, as they will vary and are dependent on the broker's number of working relationships.

Banks 

Commercial banks offer a wide variety of financial services, and mortgages are definitely one such option.  Banks can usually offer competitive rates and are a safe mortgage option for most potential homeowners, but their choices are usually limited.  If you already have an existing relationship with the bank you choose to deal with, you may qualify for certain discounts or incentives.

Savings & Loan Associations

Savings and Loan Associates do most of their business through mortgages, and their primary source of income is through making real estate loans.  The process of applying through such an institution can be simpler than through a bank; however, you may not get the best rates or the protection that a more traditional lender can offer.

Credit Unions

These institutions are formed by a group of individuals with a common interest, and customers who meet all the qualifications for membership are eligible to obtain a loan.  In many cases they offer very competitive rates and terms.

Private Individual

As long as all federal and state regulations regarding a real estate loan are covered, any individual can make such a loan as long as they have the appropriate funds.  This can either be a great option or a disastrous financial choice, depending on the terms of the loan and the agreed interest rate.  Seek out the advice of a financial advisor and attorney before signing any such document with an individual.

While there are seemingly an unlimited number of lending options for your mortgage, a little research and professional advice can help you make the choice that is right for you.

Finding A Mortgage Broker

If you are in the market for a new home, or looking to refinance your existing mortgage, then you will want to consider the option of hiring a mortgage broker rather than an individual lender or lending institution.  With times being as tough as they are for so many people, and the instability of the financial markets, shopping around for the best deal in a mortgage is of vital importance.  A mortgage broker is a one-stop mortgage option that can save you time, and most importantly, money.  Here are just a few reasons you should consider a mortgage broker.

Who Are Mortgage Brokers?

Mortgage brokers are financial professionals who are paid a commission to match lenders and borrowers.  They usually work with dozens of lenders as freelance agents and can match you with a lender than offers the best mortgage for your financial situation and personal needs.  They are qualified to evaluate your credit situation, offer you a variety of loans from different lenders, and can submit the home buyer's application to one or more lenders.  A good mortgage broker is able to find a lender to suit a buyer with just about any credit rating.

Why A Broker Can Work For You

While the idea of a commission fee paid to a broker may not seem worth it, in most cases this cost is passed back to the lender.  Brokers provide a service to lenders which saves them time and resources, and often they are willing to absorb this cost.  Lenders who work with brokers are also more aware that their offer will be competing with other offers from different institutions, and in many cases this means that you are getting the most competitive rates and terms available.

A mortgage broker can definitely find a mortgage that can work for you, but as in hiring any professional, be sure you are certain they are qualified to give you advice and services you are requesting.  Your REALTOR® can give you the names of reputable brokers in your area, and there are also a number of organizations that monitor the profession.

Financing For New Construction

When most people get a loan for a home, they are buying a house that is already built.  That means they will take out a loan that covers the existing structures and the land all at once.  However, when you decide to have a home custom-built for you, you will usually take out a slightly different type of loan.  There are a few ways to handle the financing of a house that is to be built for you.

Builder Financed Loans

Many people choose to finance the new home construction through the builder.  This can take a lot of the guesswork out of the financing.  The builder handles the financing for the construction period until the home is complete and ready to move into.  At this point the homeowner takes out a permanent, traditional mortgage on the home.

The benefit of this is that you let the builder carry the financing and then basically buy the home from them when it is done.  It saves you from having to do a dual mortgage, which is another option to consider.  It also lets the builder carry some of the risk during construction.

Taking Out Two Loans

If you finance both the construction and the home itself through your own lender, you will find yourself with two different loans.  The first is the construction loan, which is the cost of the building.  The second is the permanent mortgage that makes you the homeowner.

This is an effective way but can be more time-consuming, and means you have to apply twice for the two different loans.  The construction loan has a short time period and the permanent loan is the traditional mortgage.  You will have to pay closing costs on each loan and have different terms.  You may find that not every lender will offer both types of mortgage.

Combination Mortgages

A combination mortgage is a loan that is designed for people building new homes.  It involves only one application process and one set of closing costs, and basically converts from a construction loan to a permanent mortgage when the construction is complete.

This simplifies the loan application process but does come with a downside.  Because the options for the permanent mortgage are more limited in this scenario, buyers may find themselves paying too much on the loan in the long run.

Choosing the right mortgage depends on your circumstances and what loan terms are offered through each option.  It's important to compare them carefully and determine which one makes the most sense in the long term.