Pre-qualification

Financing issues and a guide to home purchase qualification

Financing Introduction

How much home can I afford? Is a question asked by many homebuyers. This is not an easy question, it will depend on your:
· Credit History - Have you paid your previous bills in a timely and prompt manner. Are you overextended? Do you use finance companies to purchase the majority of your goods?
· Collateral - Is the home you're buying likely to maintain its value over time? How much of your own money will you have invested?
· Capability - What is your current family gross income? Is it reasonable to assume it will grow over time? Do you have other assets to fall back on in times of need?
The lending institution you choose will use all of these factors in determining if they are willing to give you a mortgage loan.
 

Financing Qualification

The most common rule of thumb for qualification for conventional loan programs is based on the above and your Housing Expense Ratio and Total Debt Ratio. A good rule of thumb is you should spend no more than 28% of your gross monthly income for housing expenses and your total monthly debt ratio should not exceed 36% of your monthly income (including your house payment). Your housing expenses will include principal, interest, real estate taxes and insurance (PITI). Depending on the amount of your down payment, you may be required to have private mortgage insurance as well. Your lender will use the lower amount of the 2 formulas to establish your maximum mortgage amount. You can use the following form to figure our your Housing Expense Ratio and your Total Debt Ratio.

Note: Installment debts with less than 10 months remaining may not need to be included in your totals. All income needs to be ongoing and verifiable.

The lender will use the lesser of the two amounts to determine your maximum monthly payment. Don't panic if you don't hit an acceptable ratio using the above formula, this is just a general calculation and there are many programs and loans available that may require different ratios. Consult your mortgage lender for these options. What about down payments? Down payment requirements vary by loan program. A good rule of thumb is that if you are able to put 20% down on the purchase of a property, you may be able to avoid private mortgage insurance.

How do I figure out my monthly payment? Your real estate agent or mortgage lender can help you with this and you can use this simple chart to help you figure it out by yourself. This table has payments for 15 and 30 year loans. Simply take your mortgage amount (for example $100,000), divide by 1000 (this would equal 100 in our example) and multiply it by the ratio provide in the box next to the appropriate interest rate and term (7.25% for 30 years = 6.83). This should give you the monthly mortgage payment amount (6.83 X 100 = 683.00). Lenders will use more precise figures to accomplish this task, but it will give you a good estimate.

This section is very simplistic in nature and designed to give you an idea of how you might qualify for a conventional 15 or 30 years mortgage program. Actual results may vary from the above formulas. There are a multitude of mortgage programs and federal and state subsidized loans available see you lender for your exact qualification and requirements.

Financing Summary

It is a good idea to get pre-qualified or better yet, pre-approved for a mortgage by a lender. Many offer different pre-qualification or pre-approved programs based on your need and commitment level. Such a program will help in the negotiations for a home. You never know when this document will give you a leg up in the process. Pre-qualification qualification or pre-approval will also speed the application procedure and financing requirements. See your mortgage lender as soon as possible for such programs and get documentation. If you need assistance finding a lender, please let us know, we would be more than happy to provide you with several lenders that will pre-qualify you at no cost or obligation and also provide you with pre-approval programs. Pre-qualification or pre-approval will put you a step ahead in your search for a new home. It will also focus your search to the price range that you feel most comfortable with and are qualified to buy.

The members of the Rooneyteam are licensed real estate agents in the state of Wisconsin, working with

Coldwell Banker, The Real Estate Group Inc.

 rooneyteam@rooneyteam.com

All information on this site is deemed reliable, but not guaranteed

Send mail to rooneyteam@rooneyteam.com with questions or comments.
Copyright © 2008 The Rooneyteam
Last modified: 08/24/08