The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can I qualify for? As a general rule , your buying power is calculated by multiplying your annual gross income by two and a half (2 ½).
What Can I Afford?
The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can I qualify for? As a general rule , your buying power is calculated by multiplying your annual gross income by two and a half (2 ½). For example, if you have a household income of $45,000, you might be able to qualify for a $112,500 home. You could actually qualify for more or less, depending on your individual debt, credit history and amount that you have for a down payment.
Debt-to-Income Ratio
Your buying ability will be affected by factors such as your income, down payment, debt, and credit history. Your debt payments, such as credit card bills, car loans, and other expenses such as housing expenses, alimony and child support, should not exceed 36% of your gross income.
To calculate your debt-to-income ratio, divide your total monthly debt expenses by your total monthly income.
Mortgage Types/Lenders
Mortgage types, rates and lenders are usually published daily in the business section of your daily newspaper. Today's homebuyer has more financing options than ever before.
From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually everyone.
While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Ask your lenders for a "good faith estimate" so you can compare all of your costs and make the decision that will fit into your budget.
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Fixed Rate Mortgages
If you plan to own your home for five or more years, a fixed rate mortgage can protect you from inflation. Since your principal and interest payments are fixed, your monthly payment stays the same.
Long-term loans (20-30 years) make it easier for a person to qualify for a loan by giving you a lower monthly payment but at a higher interest rate. This means you are paying more interest for the full term of the loan.
Short-term loans (10-15 years) give you higher monthly payments but the interest rate is lower, which helps you build equity in your home much faster because less of the payment goes to interest.
Adjustable Rate Mortgages (ARM)
ARMs are popular because their interest rates are lower than a fixed rate mortgage, giving you a lower monthly payment. This helps the consumer qualify for a larger mortgage, but the interest rate and monthly rate may change within a given time and to a predetermined amount.
Understand the consequences to your budget by looking at each scenario. Make sure that you can afford your new monthly amount if the rate goes up.
Bi-Weekly Mortgages Recently banks have come up with creative ideas to help the consumer pay their mortgage on a bi-monthly basis instead of the traditional once a month method. Through this method of payment, you can pay off your home in less time with less money. By simply paying half of your monthly payment every 2 weeks, you will subtract 7-9 years off an average 30-year loan. You will earn equity in your home faster because more of your payment is being applied to the principal of the loan instead of the interest. At the same time, if you have Private Mortgage Insurance (PMI), those premiums will also be eliminated in a shorter period of time, which will result in a greater savings over the life of the loan. Your lender, interest rate, escrow payments, etc. all remain the same.
Balloon Mortgages
Balloon mortgages are short-term loans that have some of the features of a fixed mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the loan term, there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full or refinanced.
Reverse Mortgages
A reverse mortgage is a complex home loan designed for senior homeowners who have built up substantial equity in their property.
In a reverse mortgage, the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. The lender pays you the money either in a lump sum, in monthly installments, or as a line of credit. Unlike a traditional home equity loan or second mortgage, repayment is not required until you sell your home, move out permanently, or die. The amount of money you owe increases over time because you do not make payments. If you sell your home, you can keep any proceeds from the sale of your home in excess of what you owe the lender. To qualify for a reverse mortgage you must be at least 62 years old and the mortgage on your home must be completely or nearly paid off. You can get a reverse mortgage regardless of your current income.
F.H.A. Home Loans
The "203B" F.H.A home loan requires 3% from the borrower and permits 100% of the money needed for closing costs to be a gift from a relative, non-profit organization or a government agency. F.H.A. home loans do not have strict borrowing criteria. Someone may have had a few credit problems and still be able to qualify for this "203B" loan. For more information on F.H.A. loans go to the website www.hud.gov/offices/hsg and review the different information capsules they have available to the public.
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