Owning
your own home is the American Dream.
And that dream is more alive today than ever before.
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Owning
your own home is the American Dream. And that dream is more alive
today than ever before.
Experience
has taught us that the buying process involves common stages for
all home buyers. To help you understand that process, and make the
most of every day and dollar you spend, Long & Foster®, Realtors®
has prepared this Home Buyers Guide to provide an overview from
the planning table to the closing. After all, helping you fulfill
your home ownership dream is our business.
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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. or or Principal of loan, Interest on the Loan, Taxes and
Insurance) 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.
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The
key items are the cash down payment, the amount of the loan, the
number of years it takes to repay and the amount of interest. Some
loans have a zero down payment (VA loans or community based lenders),
3-5 % in the case of FHA or community based groups or other amounts
under 20%. These often require a mortgage insurance premium to protect
the lender. Thinking through just which financial package can be
very helpful in determining just how sellers’ house prices line
up with the buyers’ capacity to buy.
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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 the insurance
company 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. You might check on the IRS offering
for a one time withdrawal of your personal IRA.
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Mortgage
Insurance Can Reduce Down Payment. If you need a conventional loan,
loan definitions change, ask me what makes a loan “conventional”,
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 a 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.
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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, a reserve fund for replacement of appliances
and other items noted on the home inspection report after ratification
of the sale and other miscellaneous items. So don't plan to put
your last penny down on the closing table
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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.
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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.l. + All Monthly Debt Payments
__________________ = 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 us.
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More
Mortgage 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.
Thirty
year, twenty year, adjustable rate mortgages such as the true 3
year, the 3/1, 5/1, 10/1, 7/23 or 5/25, the two step, the or a negative
amortization loan are all features of the contemporary lenders inventory
of loans. These loans may or may not be useful for your consideration,
but a quick study of them may alert you to options which you might
not have realized. Please call or email me if I can be useful in
explaining any or all of them. At the end, let me help to suggest
responsible, responsive lenders who can help you to achieve your
investment goals.
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John
Fumai © 2003-2008 