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To be considered for a low down payment loan, you generally need to
have:
- Sufficient
income to support the monthly mortgage payment
- Enough
cash to cover the down payment
- Sufficient
cash to cover normal closing costs and related expenses (explained below)
- A
good credit background that indicates your payment history or
"willingness to pay"
- Sufficient
appraisal value, which shows the house is at least equal to the purchase
price
- In
some instances, a cash reserve equivalent to two monthly mortgage payments
Closing costs, or settlement costs, are paid when the home buyer
and the seller meet to exchange the necessary papers for the house to be legally
transferred. On the average, closing costs run approximately 2% to 3% of the
house price. This percentage may vary, depending on where you live.
Closing costs include the loan origination fee (if not already
paid), points, prepaid homeowner's insurance, appraisal fee, lawyer's fee,
recording fee, title search and insurance, tax adjustments, agent commissions,
mortgage insurance (if you are putting less than 20% down) and other expenses.
Your mortgage professional will give you a more exact estimate of your closing
costs.
Points are finance charges that are calculated at closing. Each
point equals 1% of the loan amount. For example, 2 points on a $100,000 loan
equals $2,000. Companies may charge 1, 2 or 3 points in up-front costs in
addition to the down payment. The more points you pay, the lower your interest
rate will be. In some cases, you may be able to finance the points.
So
How Much of a Mortgage Can You Afford?
There are two basic formulas commonly used to determine how much of
a mortgage you can reasonably afford. These formulas are called qualifying
ratios because they estimate the amount of money you should spend on mortgage
payments in relation to your income and other expenses.
It is important to remember that the following ratios may vary and
each application is handled on an individual basis, so the guidelines are just
that -- guidelines. There are many affordability programs, both government and
conventional, that have more lenient requirements for low- and moderate-income
families.
Many of these programs involve financial counseling for low- and
moderate-income people interested in buying a home and in return, offer more
lenient requirements.
Generally speaking, to qualify for conventional loans, housing
expenses should not exceed 26% to 28% of your gross monthly income. For FHA
loans, the ratio is 29% of gross monthly income. Monthly housing costs include
the mortgage principal, interest, taxes and insurance, often abbreviated PITI.
For example, if your annual income is $30,000, your gross monthly income is
$2,500, times 28% = $700. So you would probably qualify for a conventional home
loan that requires monthly payments of $700.
Any expenses that extend 11 months or more into the future are
termed long-term debt, such as a car loan. Total monthly costs, including PITI
and all other long-term debt, should equal no greater than 33% to 36% of your
gross monthly income for conventional loans. Using the same example, $2,500 x
36% = $900. So the total of your monthly housing expenses plus any long-term
debts each month cannot exceed $900. For FHA the ratio is 41%.
Maximum allowable monthly housing expense
26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA
Maximum allowable monthly housing expense and long-term debt
33% - 36% of gross monthly income - Conventional
41% of gross monthly income - FHA
One way to determine how much to spend for housing is to compare
your monthly income with monthly long-term obligations and expenses. Use the
worksheet, "Evaluating Your Financial Resources," to determine how
much money you can spend on housing. Be sure to only include income you can
definitely count on.
When budgeting to buy a home, it is important to allow enough money
for additional expenses such as maintenance and insurance costs. If you are
purchasing an existing home, gather information such as utility cost averages
and maintenance costs from previous owners or tenants to help you better prepare
for homeownership.
Homeowner's insurance or property insurance is another cost you
will have to consider. The lending institution holding the mortgage will require
insurance in an amount sufficient to cover the loan. However, to protect the
full value of your investment, you might want to consider purchasing insurance
that provides the full replacement cost if the home is destroyed. Some insurance
only provides a fixed dollar amount which may be insufficient to rebuild a badly
damaged house. |
