HOW MUCH MORTGAGE CAN I AFFORD?
Lenders look at ratios when they consider your application for a mortgage loan. A debt-to-income ratio is your monthly expenses compared to your monthly gross income. Lenders consider two ratios for your application:
- Monthly housing expenses as a percentage of income
- Total monthly debt as a percentage of income
Both ratios are important factors in determining whether the lender will make the loan.
Lenders usually require the PITI (principal, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 28% of monthly gross income. Lenders call this the front-end ratio. In other words, if your monthly gross income is $5,000 or $60,000 annually, your mortgage payment should be $1400 or less:
$5,000 x 28% = $1400 – maximum monthly housing costs
Lenders usually require housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. Lenders call this the back-end ratio. In other words, if your monthly gross income is $5000, the combination of your mortgage, $1400, and other long-term debt should be no more than $1800:
$5000 x 36% = $1800 – maximum total debt
If your debt-to-income exceeds these ratios, talk to your lender about your options. Some lenders allow up to a 41% back end ratio.
BASIC MORTGAGE OPTIONS
15-YEAR MORTGAGE
- Lower interest rate
- Build equity faster
- Less interest to pay
- Larger monthly payment
30-YEAR MORTGAGE
- Higher interest rate
- Build equity slower
- Can deduct more interest
- Lower monthly payment
FIXED RATE
- Interest rate stays the same for the term of the loan
- Interest rates could go down while you are locked into your mortgage at a higher than market rate
VARIABLE RATE
- Interest rate can increase or decrease during the term of the loan
- You might have a low rate for an three, five, seven, or ten years
- Monthly payments can be lower than fixed rate loans
BALLOON MORTGAGE
- A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years)
- Requires a lump sum payment of the remaining principal balance at the end of a shorter term (e.g., 10 years)
- Interest rate stays the same for the term of the loan
QUESTIONS AND CONSIDERATIONS TO — USE WHEN CHOOSING A LENDER
| BASIC INFORMATION ABOUT THE LOAN | Mortgage 1 | Mortgage 2 | Mortgage 3 |
| Type of loan (fixed rate, variable rate, conventional, FHA?) | |||
| Minimum down payment requirement | |||
| Loan term (length of loan) | |||
| Contract interest rate | |||
| Annual Percentage Rate (APR) | |||
| Points (may be called discount points) | |||
| Monthly PMI payments (mortgage insurance) | |||
| How long must you keep PMI? | |||
| Estimated monthly escrow for taxes and insurance | |||
| Estimated monthly payment (principal, interest, taxes, insurance, PMI) |
|||
| FEES: lenders have different names for similar fees. Listed below are some of the fees you may see on loan docs. | |||
| Application fee | |||
| Origination/Mortgage broker fees (may be quoted as points, origination fees, or interest rate add-on) | |||
| Lender fee | |||
| Appraisal fee | |||
| Recording fee | |||
| Credit report fee | |||
| OTHER COSTS AT CLOSING/SETTLEMENT | |||
| Attorney Fee | |||
| Title search/title insurance | |||
| Can any of the fees or costs be waived? | |||
| Estimated prepaid amounts for interest, taxes, hazard insurance, payments for escrow | |||
| State and local taxes, stamp taxes, transfer taxes | |||
| Flood determination | |||
| Prepaid PMI | |||
| Surveys and home inspections | |||
| PREPAYMENT PENALTIES | |||
| Is there a prepayment penalty? | |||
| If so, how much is it? | |||
| How many years does the penalty period last? | |||
| Are extra principal payments allowed? | |||
| LOCK-INS | |||
| Is the lock-in agreement in writing? | |||
| Is there a fee to lock-in? | |||
| When does the lock-in occur (at application, approval or another time?) | |||
| How long will the lock-in last? | |||
| When the rate drops before closing, can you lock-in at a lower rate? | |||
| IF THE LOAN IS AN ADJUSTABLE RATE MORTGAGE | |||
| What is the initial rate? | |||
| What is the maximum the rate could be next year? | |||
| What are the rate and payment caps each year and over the life of the loan? | |||
| What is the frequency of rate change and any changes to the monthly payment? | |||
| What is the index the lender will use? | |||
| What margin will the lender add to the index? | |||
| OTHER IMPORTANT CONSIDERATIONS | |||
| Will I work directly with you for the entire process? | |||
| What are the closing costs? | |||
| How long does it take to close from application date? |
HOMEBUYER ASSISTANCE PROGRAMS
There are a number of different programs available for first-time homebuyers. The following are just a few examples of the programs available.
FEDERAL HOUSING ADMINISTRATION (FHA) INSURED LOANS
The 203(b) is the most common FHA loan, featuring:
- Low down payment
- Flexible qualifying guidelines
- Limited lender fees
- Maximum loan amounts
DEPARTMENT OF VETERANS ADMINISTRATION (VA) INSURED LOANS
Features of VA loans include:
- You must be an eligible veteran
- There are no down payment requirements
- Competitive and negotiable fixed interest rates
- Limitations on closing costs
- Longer payment terms