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.
Bear in mind, however, that lenders will look at more than just your
income to determine the size of the loan. Likewise, you may find that
there are some creative financing options that can help boost your
purchasing power.
Loan Pre-Qualification vs. Pre-Approval
One of the best ways to determine your budget is to have your real
estate agent or lender pre-qualify you for a loan. Pre-qualification is
different from pre-approval, because it is only an estimate of what
you'll be able to afford. On the other hand, pre-approval 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.
Down Payments Make A Difference
If you can make a large down payment, lenders may be more lenient with
their qualifying ratios. For example, a person with a 20 percent down
payment may be qualified with the 33 percent housing expense ratio,
while someone with a 5 percent down payment is held to the stricter 28
percent ratio.
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.
To Find out more about negotiating the price on your new home click
HERE .
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