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The first step in finding a home is figuring out how much of an expense you can meet.
There are different factors to consider when making this
decision, with three of them related to a mortgage, and the other three focused
on broader personal considerations, such as how long you plan to own the home,
(What type of loan program to consider).
The Mortgage Loan
Taking out a home loan is probably
the longest process facing prospective home
professional loan officers. The lender will ask you all sorts of questions about your
income and savings, and make sure the home you are purchasing is fully
functional.
Look at it as if you were loaning the money. If you were going to lend people
money, what would you want to know about them? Basically, you'd like to know The
four C's. (1) credit, (2) collateral. (3) capacity to pay (4) and character.
Ideally, you will want to come up with at least 20% of the value of your new home as a down payment, to avoid things like mortgage insurance payments. But, you probably qualify for plenty of financing arrangements that will get you into a new home for as little as 3% of the asking price. We'll talk more about
business and those special programs later.
The lender will also plug your income numbers into a couple of formulas: the front-end ratio (having to do with your
loan payments) and the back-end ratio (having to do with your debt).
Let's say your gross income is $4,000 a month, and you have $400 a month in debt payments. The rule of thumb is that they'll allow you to pay 29% of your gross income toward your
loan payment every month. This is known as the front-end ratio. In this example, 29% of $4,000 is just under $1,200 a month -- so, they'll reason, you can put $1,200 toward your
loan payment. |
