| How
Much House?
House hunting begins at home –
with planning. The first step toward buying a house is
to sit down. Before you grab the road maps and hit the
streets, you need to do a little planning. We call it
“pre-qualifying.” Simply, it’s determining how much
house you can afford to buy. Knowing your affordable
price range will bring your house hunting into focus.
Many lenders, for a small "upfront" fee, will send out
all required verifications and pre-approve you for a
mortgage, allowing you the opportunity to negotiate as a
cash buyer.
How much house you can afford
to buy depends on two things. How much you can afford
for the monthly housing payment. And, how much you can
invest in the down payment. Monthly payments include
principal and interest on the mortgage loan, and
property taxes and insurance against fire and other
hazards. These four costs are often abbreviated "P.I.T.I."
(For some buyers and lenders, monthly housing costs may
also include homeowner association dues, condominium
fees and mortgage insurance.)
Qualify
In 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 (P.I.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.
I can help you in determining just how much house you
can afford.
Sources
For Your Down Payment
The
obvious source of money for your down payment is either
your savings or the proceeds from the sale of a home you
already own. But there are some other not so obvious sources.
In recent years, for example, "parent power" has taken
some new twists for first-time buyers.
Home Equity Loan
Parents often have considerable
equity built up in their own homes-and many are tapping
that asset through home equity loans to make a gift
to the youngsters. Ask your tax advisor for current
information. Often lenders will require a "gift letter"
to verify that parents don't expect repayment.
Shared Equity/Profit-Sharing
In return for providing a part
of the down payment, the parents (or another investor)
share in the "profit" or net equity of the house when
the home owners eventually sell it.
Life Insurance
If you have built up a cash
value on your life insurance policy over the years,
you may be able to borrow from your insurance company
up to the amount of this accumulated cash value. Often
they will even ask a more favorable interest rate
than would be asked for other types of loans.
Stocks and Bonds
If you feel the market doesn't
favor selling your stocks or bonds now, you may be
able to secure a bank loan using your portfolio as
security.
Company Profit Sharing or Savings
Plan
Look into the possibility of
withdrawing what you have in your profit sharing or
savings plan account or borrowing against it, if your
company has these programs.
How
To 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 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 Budget
Generally, lenders figure
that the home buyer shouldn't pay more than 28-38 percent
of gross income for P.I.T.I. 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 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
Total Monthly Housing Costs
(P I. T I.)
__________________ = 28% (or less)
gross Monthly Income
36% Formula
P.I.T. + All Monthly Debts
__________________ = 36% (or less)
gross Monthly Income
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
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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