Tag Archives: mortgage

Homeownership 101: Are You Ready?

Owning your own home is part of the American dream. But it takes more than just dreaming of buying and maintaining a home. Before you take the plunge, here are some things to ask yourself.

Does it make sense to buy?

Buying instead of renting needs to make sense financially. To help you decide, play with Zillow’s Buy vs. Rent calculator to see how many years it will take before the cost of buying equals the cost of renting. It’s called the breakeven horizon, and it varies by area of the country.

If you plan to stay in your home past your breakeven horizon, then buying makes financial sense. If you think you’ll move earlier, then renting may be the way to go.

Are you financially ready?

Buying a house involves raising a down payment and paying a monthly mortgage, which lasts anywhere from 5 to 30 years, depending on the home loan you can afford and are offered. There are other costs as well, but let’s focus on the big money.

Down payment: It’s the lump sum you’ll pay upfront that funds equity in the property and proves to lenders that you’ve got skin in this homeowner game. Down payments vary. In the go-go days that led up to the housing collapse, some lenders dismissed the down payment altogether – and we see how well that ended. Today, 20 percent is preferred and often gets you the best rates, but some loans allow down payments as low as 3 percent. Sometimes parents or friends can offer help with the down payment. If you have a choice, take a gift rather than a loan, not only for obvious reasons, but because lenders will add that debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43 percent to qualify for a home loan.

Monthly mortgage payments: This is what you’ll pay each month. In most cases, a mortgage includes the loan principal and interest (both amortized over the life of the loan) plus homeowners insurance and property taxes (pro-rated). When credit was tight, getting a mortgage at any rate was reserved for only the most credit-worthy borrowers. Things have loosened, but lenders still want to know that you’re a responsible, gainfully employed and credit-worthy candidate.

Are you emotionally ready?

Owning a home is a huge commitment so before jumping in, consider if you are ready to make lots of decisions, from picking an agent to picking paint colors. Are you confident enough to select a neighborhood where you’ll want to stay for a while? And are you up for devoting the time and attention to maintaining a home? Weekends will disappear under chores like pulling weeds, cleaning gutters, shoveling snow, sealing counters and decks, and on and on. Taking care of your biggest investment can be gratifying but only if you’re ready.

Do you have the skills?

Your home will require regular maintenance and repair, and there’s no landlord to call for help. You’ll need some basic handyperson skills so you won’t go broke hiring a repair professional to remedy every odd sound or smell. Here are some things every homeowner should learn how to do:
• Change a toilet flapper
• Shut off the main water valve and outdoor faucets
• Change a furnace filter
• Clean gutters of debris
• Change smoke detector batteries
• Locate and flip breaker switches
• Locate studs to hang shelves
• Paint a room

Post courtesy of zillow.com

How Much House Can You Really Afford?

Just because a lender approves you for a mortgage doesn’t mean you can comfortably afford it.

If you ask Google “how much house can I afford,” you’ll find a number of online tools and mortgage calculators to help you find a fast answer. You might also find quick but somewhat confusing advice like “your mortgage payment shouldn’t take up more than 35% of your monthly income.”

Quick. Do you know what 35% of your monthly income is? If not, you’re not alone. While online housing tools are a helpful starting point for the early stages of your house hunt, it’s important that you understand how the pieces all fit together, and that you take your personal financial situation into account.

Why a calculator can’t tell you how much house you can afford

  1. 1. Financial rules of thumb may not apply to you

    While 35% seems like a straightforward figure, your financial picture is a lot more complicated than that number would make things seem. Your ideal monthly housing costs could vary depending on things such as debt and other monthly payment obligations — not to mention how much you’ve saved for a down payment.

    If you have high credit scores and a clean financial background, a mortgage calculator can be a great starting point for mortgage shopping. You’ll get a much better sense of what your price range might be instead of a blanket rule of thumb. But they’re only as accurate as the information you provide, so if you forget to add regular budget line items such as food, day care, or gas costs, you won’t get a complete picture.

  2. 2. Your lender may approve you for more than you can realistically afford

    Lenders are now legally required to ensure borrowers can “reasonably afford” to repay a loan before they approve a new mortgage. But there’s a difference between being able to reasonably afford something and being able to realistically afford something.

    When looking at what’s reasonable, lenders account for your income and any current debts that you need to repay each month. If you make $5,000 per month after taxes and need to pay $500 toward your car loan each month, a mortgage payment of $1,500 may seem perfectly reasonable.

    In this (extremely simplified) example, you’d have about $3,000 per month left over to handle all your other expenses. And perhaps you can afford your living expenses on this budget.

    But what about the other goals you want to achieve? What about saving for retirement or investing for your future?

    If you commit to a large monthly mortgage payment, you may find yourself squeezed to make your remaining money cover your living expenses, plus monthly bills and loan repayments. While a lender can give you a mortgage you can reasonably afford, it could mean not being able to handle other financial priorities.

  3. 3. You’re the only one who can determine what’s comfortable

    Only you can examine your life and values to determine what you are willing to spend on your mortgage budget — and what you’re not.

    You might be perfectly happy to take on a larger monthly mortgage payment in exchange for reducing meals out, cutting back on vacations, or sticking with your old phone instead of going for the upgrades just because you can. Or you may decide that renting makes more sense for you because you can mitigate costs, take on less financial responsibility, and enjoy more flexibility.

    Either way, you need to determine what you feel comfortable with. You need to decide what works within both your budget and your long-term plans to reach goals that matter to you.

  4. 4. Ask yourself these questions to decide how much house you can really afford

    Once you set your financial priorities, here’s where you’ll need to do the math:

    • What’s my current income? What are my basic living expenses? What are my fixed costs?
    • How much do I want to put away each month into savings or investments?
    • How much will it cost to maintain my new home?
    • What kind of down payment do I have? (The more you put down, the smaller your monthly mortgage payment will be.)

    Now you can factor a mortgage into all of the above, and see how much you can really afford. When doing so, don’t forget to count both the mortgage principal and interest — along with property taxes, homeowners’ insurance, and other extras such as HOA fees.

Post courtesy of trulia.com

What Is Stability of Income? The Key to Getting a Great Mortgage

When you apply for a mortgage to buy a home, lenders will scrutinize many aspects of your finances to gauge whether you can handle those hefty monthly payments. They’ll check how much income you’re earning, of course, but they’ll also probe deeper by assessing your stability of income. So what is stability of income? This is an evaluation of how dependably you can continue to bring in the amount of money that you are currently earning.

Along with your credit score (your track record of paying off debts), “stability of income is the main criteria that lenders use to assess a potential buyer’s qualification for a mortgage,” says Bill Golden, an Atlanta-based Realtor.

Of course, lenders don’t have a crystal ball pinpointing when you’ll get that raise or if layoffs are on the horizon. Instead, like with your credit score, they will presume that your past and present situations are a decent predictor of your future. If they spot anything suspicious, they may ask for an explanation, so it’s best to have a good response ready. So here’s what mortgage officers scrutinize and the best way to respond.

Gaps in employment

Mostly, lenders want to see a consistent work history—namely, that you’ve been working for at least two years. If you have more than a one-month gap in your work life, underwriters will want to hear a good reason why. Perhaps your work is seasonal or you took maternity leave, or suffered an illness or death in the family. Whatever the reason, a lender may ask you to explain the gap in a letter.

Also be prepared to back up your explanation with paperwork. If you left a job to pursue an MBA, you may be asked to produce a university transcript. Or if you took medical leave due to a health issue, you may be asked for documentation from your doctor. (Be aware that it is illegal to deny a pregnant woman a mortgage.)

Frequent job changes

Changing jobs frequently isn’t necessarily a bad thing in the eyes of a mortgage lender. Silicon Valley workers, for instance, are often hopping from one tech company to another.

What lenders want to see is that you’re moving up, not just moving. You’ll have to prove that the new jobs were advancements, came with more money, or offered better benefits like matching 401(k)s.

The key point is that lenders want to know that your income will at least stay the same, not necessarily that the same employer is paying that income.

Probability of continued employment

Lenders will also try to divine how likely you’ll stay in your current job or, if you leave, what the chances are that you’ll find employment elsewhere. Are you in a hot industry, offering a service everyone needs, or are you holding out to be the last switchboard operator in town? Your longevity in the field, education, and experience matter as well.

Consistency is key: If you’ve been with the same company for 15 years, lenders typically accept that tenure as an assurance that you’ll probably work there a while longer. But if you’ve been working for a company for just one year, that doesn’t mean you’re damaged goods. In that case, a lender may ask for a letter from your boss saying what a great employee you are and how great it would be if you stay there forever (or at least well into the foreseeable future).

Courtesy of realtor.com