One of the most important rules of home buying is understanding
how much home you can really afford. A good real estate agent can usually give you a
ballpark estimate of the amount of a loan you are most likely to secure. A lender may also
"pre-qualify" you with a similar estimate. Pre-qualifying however, is no
guarantee you will be able to obtain a loan. An appointment with a lender can get you
pre-approved for the maximum amount of mortgage you can secure. The procedure includes
running a credit check and verifying your income and expenses. Your lender may then
provide you with a certificate of approval for the amount of the loan for which you
qualify.
You and your Real Estate Agent can then start hunting for your home with confidence and
save a great deal of time by limiting the search for homes that meet your price range and
needs. You'll also be in a much better bargaining position when it comes to negotiating
the best price for the homes you choose. Pre-approval of a mortgage will also help your
transaction move forward to a quicker closing. I have a wide variety of resources that
will help guide you through the process
Pre-Qualified versus Pre-Approved- ( A more detailed description )
Loan pre-qualification vs. pre-approval
One of the best ways to determine your budget is to have your real estate agent or lender
pre-qualify you for a loan. Pre-qualification is different from pre-approval, because it
is only an estimate of what you'll be able to afford. Pre-approval is a more formal
process where a lender examines your finances and agrees in advance to loan you money up
to a specified amount.
Lenders will look at more than just your income to determine the size of the loan.
Likewise, you may find that there are some creative financing options that can help boost
your purchasing power. Banks and lending institutions will use several criteria to
determine how much money they'll agree to lend. These include:
Your credit history
The amount of your outstanding debts
The amount of money you have available for a down payment and closing costs
Your gross monthly income
Your choice of mortgage (15, 30-year, FHA, VA etc.)
Current interest rates
Lenders also use your financial information to figure out two, very important ratios: the
debt-to-income ratio and the housing expense ratio.
Debt-to-income ratio
Many lenders use a rule of thumb that the amount of debt you are paying on each month (car
payment, student loan, credit card, etc,) shouldn't exceed more than 36 percent of your
gross monthly income. FHA loans are slightly more lenient.
Housing expense ratio
It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to
33 percent of your gross monthly income.
If you can make a large down payment, lenders may be more lenient with their qualifying
ratios. For example, a person with a 20 percent down payment may be qualified with the 33
percent housing expense ratio, while someone with a 5 percent down payment is held to the
stricter 28 percent ratio.
Other ways to improve your purchasing power include the following:
Negotiating Closing Costs
Through negotiation, some sellers may agree to pay all or most of your closing costs (for
example, if you agree to meet their full asking price). If you choose to try this, make
sure to ask your real estate agent for advice.
Loan Programs
Many local governments have special loan programs designed to help first-time homebuyers.
Loans may be available at reduced interest rates, or with little or no down payments.
Check with your local housing authority for more information.
Loan Types
Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest
rates. Others opt for 30-year loans because they have lower monthly payments than 15-year
loans. There are significant differences between different loans, so make sure to discuss
the pros and cons of different loans with your agent or lender before making a decision.
Gifts
If you're having trouble saving money, many lenders will allow you to use gift funds for
the down payment and closing costs. However, most lenders require a "gift
letter" stating the gift doesn't have to be repaid, and will also require you to pay
at least a portion of the down payment with your own cash.
Buyers or Sellers should always do the research on any aspects of a real estate
transaction or consult with a licensed professional. Real Estate Settlement Procedures Act
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