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How Much Can You Afford?

 Understanding how much you can afford is one of the most important rules of home buying. Depending on your individual situation, your budget can affect everything from the neighborhoods where you look, to the size of the house, and even what type of financing you choose.

Lenders will look at more than just your income to determine the size of the loan, including but not limited to assets, debt-to-income ratios, work history, reserves, and down payment. Likewise, you may find that there are some creative financing options that can help boost your purchasing power.

Loan prequalification vs. preapproval
One of the best ways to determine your budget is to have your Lender, that’s me, prequalify you for your loan. Prequalification is different from preapproval, because it is only an estimate of what you'll be able to afford. On the other hand, preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount.

What factors are important to lenders?
Banks and lending institutions will use several criteria to determine how much money they'll agree to lend. These include:

• Your gross monthly income
• Your credit history
• The amount of your outstanding debts
• Your savings--or the amount of money you have available for a down payment and closing costs
• Your choice of mortgage (i.e. 30-year, FHA, etc.)
• Current interest rates

Two important ratios
Lenders also use your financial information to figure out two, very important ratios: the debt-to-income ratio and the housing expense ratio.

Debt-to-income ratio
Many lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit card, etc,) shouldn't exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient.

 

Housing expense ratio
It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.
 

Other ways to improve your purchasing power
 

Gifts
If you're having trouble saving money, many lenders will allow you to use gift funds for the down payment and closing costs. However, most lenders require a "gift letter" stating the gift doesn't have to be repaid, and will also require you to pay at least a portion of the down payment with your own cash.

Negotiating Closing Costs
Through negotiation, some sellers may agree to pay all or most of your closing costs (for example, if you agree to meet their full asking price). If you choose to try this, make sure to ask your real estate agent for advice.

Loan Programs
Many local governments have special loan programs designed to help first-time homebuyers. Loans may be available at reduced interest rates, or with little or no down payments. Check with your local housing authority for more information.

Loan Types
Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for 30-year loans because they have lower monthly payments than 15-year loans. There are significant differences between different loans, so make sure to discuss the pros and cons of different loans with your agent or lender before making a decision.

Understanding Different Types of Loans

General categories of loans
Most loans fall into two major categories: fixed-rate mortgages and adjustable-rate mortgages.

• Fixed-rate mortgages
  As the name implies, a fixed-rate mortgage carries the same interest rate for the life of the loan. 
• Adjustable-rate mortgages (ARM)
  Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and monthly payment can change over the life of the loan. 

Balloon payments
A balloon payment refers to a loan that has a large, final payment due at the end of the loan term.

FHA and VA loans
U.S. government loan programs such as those of the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans often require smaller or no down payments with competitive interest rates.

Conventional loans
A conventional loan is simply a loan offered by a traditional private lender. They may be fixed-rate, adjustable, hybrid or other types.

Closing Costs

The bundle of fees associated with the buying of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.

Buyer closing costs
When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:

• The down payment
• Loan fees (points, application fee, credit report)
• Prepaid interest
• Inspection fees
• Appraisal
• Mortgage insurance
• Hazard insurance (typically 1 years premium plus an escrow of 2 months)
• Title insurance
• Documentary stamps on the note

How To Contact Us:

Email:

 For all Mortgage inquiries or assistance contact  Joel here:

JSHAFRAN@houston.rr.com
 

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