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Owning your own home is the American Dream. And that dream is more alive today than ever before. Experience has taught us that the buying process involves common stages for all home buyers. To help you understand that process, and make the most of every day and dollar you spend, Long & Foster, Realtors has prepared this Home Buyers Guide to provide an overview from the planning table to the closing. After all, helping you fulfill your home ownership dream is our business. |
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How Much House?Owning your own home is the American Dream. And that dream is more alive today than ever before.
Experience has taught us that the buying process
involves common stages for all home buyers. To help you understand
that process, and make the most of every day and dollar you spend,
Long & Foster, Realtors has prepared this Home Buyers Guide
to provide an overview from the planning table to the closing. After
all, helping you fulfill your home ownership dream is our business.
QualifyIn today's market an "affordable" home is not so much determined by sales price as it is by the financing which translates that price into a monthly payment. A house hunter's first step is to set a housing budget, then go shopping for the house (price) and payments (PI.T I.) that fit that budget.
Even though there are many ways to qualify to
buy a home, make sure the monthly payment makes sense for you. A
current rule of thumb is that the monthly payment should not be
more than 25-33% of gross monthly income. Restrictions will apply
for smaller down payments.
How Much Can I Afford?
The key items are the size of the down payment,
interest rate, APR and the amount of the mortgage. The down payment
might be zero in the case of VA-backed mortgages. Or a buyer may
invest 20 to 25 percent of the purchase with a conventional loan
and not be required to buy mortgage insurance.
can be very helpful to you in determining just how much house you
can afford.
Sources For Your Down Payment
Home Equity Loan
Shared Equity/Profit-Sharing
Life Insurance
Stocks and Bonds
Company Profit Sharing or Savings Plan
How To Reduce Down PaymentMortgage Insurance Can Reduce Down Payment If you need a conventional loan, there is a way to put down only 5 or 10 percent. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, and allows the lender to approve a larger mortgage amount.
In a common approach, you'd pay an initial amount
at closing (often one percent of the mortgage if your down payment
is 5 percent, 1/2 of 1 percent if you put down 10 percent). Then,
included in your monthly payments for your mortgage, you would pay
an additional one-twelfth of 1/4 percent of the mortgage balance.
This payment will usually continue until dropped at the discretion
of the lender, unless a stop point is specifically written into
the deed of trust, such as accumulating a 20% equity. Ask your lender
for specific figures for any loan program you are considering, as
the amount of mortgage insurance varies by the type of loan.
One Caution
The larger the down payment, the less money
you need to borrow, which means a lower monthly payment. However,
remember that in addition to your down payment and monthly payments,
you will need money to pay for closing costs, moving, appliances,
household setup, a reserve for family emergencies and other miscellaneous
items. So don't plan to put your last penny down on the closing
table
Figuring Your Housing BudgetGenerally, lenders figure that the home buyer shouldn't pay more than 28-38 percent of gross income for PI.TI. payments, or 36-38 percent for both P.I.T I. and monthly debts combined. This might be a little more or a little less depending on other outstanding long term debts (more than 10 months), alimony/child support payments, number of children and their ages, and other household budget items.
The easiest way to make a quick estimate of
the mortgage amount you may qualify for requires applying the two
basic formulas for loan application that lenders use. Keep in mind
the loan balance will vary over the term of the loan, although the
monthly payment remains the same.
Two Lender FormulasTwo Lender Formulas Most lenders will require that loan applicants meet both guidelines before approving a mortgage loan. The first formula compares income to housing costs without including long term debts, the second includes all debts.
28% Formula
36% Formula
A variety of other formulas exist. VA and some lenders use a single ratio based on mortgage payment and all debts, which allows easier qualifying for a more expensive home for a borrower with little debt.
To figure your housing budget, simply multiply
your gross monthly income (before taxes) by 28% and 36%. For example,
a family with a monthly income of $3,500 might qualify for a mortgage
with payments up to $980. For specific figures, ask me
Mortgage Help
More Mortgage Help New types of mortgages, such
as graduated payment mortgages, flexible payment mortgages and deferred
interest loans, feature monthly payments that start lower than usual
in the early years--and thus help home buyers "afford"
more house and buy sooner by qualifying on a lower mortgage payment.
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Ingrid
Dallaire
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