Post by LIFE AND DEATH on Aug 5, 2005 23:38:16 GMT -5
Buying a Home
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Empower Yourself for Homeownership
presented by Century 21 Mortgage and Nationwide Advantage
Mortgage They say "knowledge is power." However, what good is knowledge if you don't apply it? Before you buy a home, you should plan what you will need to do before, during, and after your purchase. As you take the necessary steps toward homeownership, it's important to know what and how to prepare for your big day. This article will help you master the ABCs of Affordability, Budget, and Credit.
Affordability
Before you decide to buy, you should know about the accounting formulas a lender may use to decide whether to make a loan. The formulas tell a lender how much of a loan you can afford based on how much you earn and how much you have to pay each month.
How Much Home Do I Qualify For?
A general rule of thumb is used to figure out how much of a house you can afford—typically, your salary multiplied by 2.5. So if your salary is $45,000, technically you can afford a home between $110,000 and $115,000. But that's in a perfect world with no debt. The higher debt you have, the less likely you will be able to comfortably pay a mortgage. Depending on your personal financial situation, you may decide to look into purchasing a property that falls on the lower end of your affordability scale rather than the higher end. It may be better to know that you can make a payment without having to struggle and stretch your budget to accommodate the mortgage. What you decide will affect your quality of life.
You may also want to know how much the loan you are considering will cost you. The cost should take into account not just the monthly payment but also amounts you pay at closing and the time you will remain in your house.
The Rationale Behind Ratios
It's important to understand the world of ratios when considering applying for a loan. Ratios are a formula that helps lenders determine your creditworthiness.
Debt-to-income ratio (qualifying ratio)
Your monthly minimum debt divided by your gross monthly income, excluding mortgage or rent. The formula to calculate debt-to-income ratio is Monthly Gross Income/Total Debt Payments. So if James Smith makes $2,000 month before taxes, and his only debt is his credit cards which have a monthly minimum payment of $400, his debt-to-income ratio is 20% ($400/$2,000 = .20).
Front-end ratio (housing expense-to-income ratio)
Compares potential monthly mortgage payment to the gross monthly income of your total household. For example, if your mortgage payment is $600 and your household monthly income is $1800, you have a front-end ratio of 33%.
Back-end ratio (debt-to-income ratio)
Compares your monthly minimum debt, including the estimated mortgage, to the gross monthly income of your total household.
Debt-to-Income Ratio. Remember the formula! Monthly Gross
Income/Total Debt
Monthly income $1,500
Credit Cards $100
Car Loan $250
Student loan $100
Total monthly debt = $450 with a debt-to-income ratio of 30%
As a general rule, if your debt-to-income ratio is low—under 20%—then your immediate financial picture looks good. Higher ratios may indicate a need to control credit and become more stable financially.
Budget
Budgets are like exercise. Many of us admit that it would be a good discipline, but we don't actually do it. Budgeting is extremely important when you are preparing to make what may be the largest purchase of your life. Budgeting now will help you reach your goal of having enough cash to pay your down payment and closing costs later. A lack of sufficient cash for these costs is one of the largest barriers to homeownership.
In order to budget, you need to know how you spend your money. When creating your monthly budget, be realistic about what you need and what you want. The majority of your living expenses should take up approximately 65% of your budget. Credit card bills or loans should be no more than 20%, and you should attempt to save up to 15% of your budget.
Before you begin, you may want to ask yourself a few questions concerning how you can adjust your lifestyle in order to reach your goal of homeownership.
* Should I take a vacation this year?
* Should I cook more often instead of going to restaurants?
* Do I really need cable?
* Should I go to the movies less?
* Should I use generic items as opposed to name brand items?
Credit
When you apply for a loan, lenders will look at your credit history to get a picture of your financial profile, including how you handle credit and how you've reestablished credit, if necessary. The following list gives you an idea of acceptable and not-so-acceptable habits.
Good---Bad
Payments on time---Payments past 30, 60, or 90 days
Living in the same place for a longer time---Moving frequently
Low loan balances---High loan balances
Inquiries for your credit report---Several credit cards
Make sure you know what your credit report looks like before applying for a loan. The report may contain incorrect information. You are responsible for contacting the agency(s) and correcting any errors. You can order your report online via CreditExpert.com.
And, just as you eliminated "extra" purchases or activities from your budget, you might consider paying off and closing some of your card accounts. When calculating your debt-to-income ratio, lenders count the full amount of your credit limit even if your current balance is zero.
The ABCs
Before you actually buy a home, get your house in order by understanding what's affordable, creating and sticking to a budget, and properly managing your credit. It is really useful to estimate what your living expenses might be. This is just the beginning of the wonderful journey toward homeownership.
Empower Yourself for Homeownership
presented by Century 21 Mortgage and Nationwide Advantage
Mortgage They say "knowledge is power." However, what good is knowledge if you don't apply it? Before you buy a home, you should plan what you will need to do before, during, and after your purchase. As you take the necessary steps toward homeownership, it's important to know what and how to prepare for your big day. This article will help you master the ABCs of Affordability, Budget, and Credit.
Affordability
Before you decide to buy, you should know about the accounting formulas a lender may use to decide whether to make a loan. The formulas tell a lender how much of a loan you can afford based on how much you earn and how much you have to pay each month.
How Much Home Do I Qualify For?
A general rule of thumb is used to figure out how much of a house you can afford—typically, your salary multiplied by 2.5. So if your salary is $45,000, technically you can afford a home between $110,000 and $115,000. But that's in a perfect world with no debt. The higher debt you have, the less likely you will be able to comfortably pay a mortgage. Depending on your personal financial situation, you may decide to look into purchasing a property that falls on the lower end of your affordability scale rather than the higher end. It may be better to know that you can make a payment without having to struggle and stretch your budget to accommodate the mortgage. What you decide will affect your quality of life.
You may also want to know how much the loan you are considering will cost you. The cost should take into account not just the monthly payment but also amounts you pay at closing and the time you will remain in your house.
The Rationale Behind Ratios
It's important to understand the world of ratios when considering applying for a loan. Ratios are a formula that helps lenders determine your creditworthiness.
Debt-to-income ratio (qualifying ratio)
Your monthly minimum debt divided by your gross monthly income, excluding mortgage or rent. The formula to calculate debt-to-income ratio is Monthly Gross Income/Total Debt Payments. So if James Smith makes $2,000 month before taxes, and his only debt is his credit cards which have a monthly minimum payment of $400, his debt-to-income ratio is 20% ($400/$2,000 = .20).
Front-end ratio (housing expense-to-income ratio)
Compares potential monthly mortgage payment to the gross monthly income of your total household. For example, if your mortgage payment is $600 and your household monthly income is $1800, you have a front-end ratio of 33%.
Back-end ratio (debt-to-income ratio)
Compares your monthly minimum debt, including the estimated mortgage, to the gross monthly income of your total household.
Debt-to-Income Ratio. Remember the formula! Monthly Gross
Income/Total Debt
Monthly income $1,500
Credit Cards $100
Car Loan $250
Student loan $100
Total monthly debt = $450 with a debt-to-income ratio of 30%
As a general rule, if your debt-to-income ratio is low—under 20%—then your immediate financial picture looks good. Higher ratios may indicate a need to control credit and become more stable financially.
Budget
Budgets are like exercise. Many of us admit that it would be a good discipline, but we don't actually do it. Budgeting is extremely important when you are preparing to make what may be the largest purchase of your life. Budgeting now will help you reach your goal of having enough cash to pay your down payment and closing costs later. A lack of sufficient cash for these costs is one of the largest barriers to homeownership.
In order to budget, you need to know how you spend your money. When creating your monthly budget, be realistic about what you need and what you want. The majority of your living expenses should take up approximately 65% of your budget. Credit card bills or loans should be no more than 20%, and you should attempt to save up to 15% of your budget.
Before you begin, you may want to ask yourself a few questions concerning how you can adjust your lifestyle in order to reach your goal of homeownership.
* Should I take a vacation this year?
* Should I cook more often instead of going to restaurants?
* Do I really need cable?
* Should I go to the movies less?
* Should I use generic items as opposed to name brand items?
Credit
When you apply for a loan, lenders will look at your credit history to get a picture of your financial profile, including how you handle credit and how you've reestablished credit, if necessary. The following list gives you an idea of acceptable and not-so-acceptable habits.
Good---Bad
Payments on time---Payments past 30, 60, or 90 days
Living in the same place for a longer time---Moving frequently
Low loan balances---High loan balances
Inquiries for your credit report---Several credit cards
Make sure you know what your credit report looks like before applying for a loan. The report may contain incorrect information. You are responsible for contacting the agency(s) and correcting any errors. You can order your report online via CreditExpert.com.
And, just as you eliminated "extra" purchases or activities from your budget, you might consider paying off and closing some of your card accounts. When calculating your debt-to-income ratio, lenders count the full amount of your credit limit even if your current balance is zero.
The ABCs
Before you actually buy a home, get your house in order by understanding what's affordable, creating and sticking to a budget, and properly managing your credit. It is really useful to estimate what your living expenses might be. This is just the beginning of the wonderful journey toward homeownership.