| To be considered for a low down payment loan, you | | | | for low- and moderate-income people interested in |
| generally need to have: | | | | buying a home and in return, offer more lenient |
| 1. Sufficient income to support the monthly mortgage | | | | requirements. |
| payment | | | | Generally speaking, to qualify for conventional loans, |
| 2. Sufficient cash to cover normal closing costs and | | | | housing expenses should not exceed 29% to 33% of |
| related expenses (explained below) | | | | your gross monthly income. For FHA loans, the ratio is |
| 3. A good credit background that indicates your | | | | 29% of gross monthly income. Monthly housing costs |
| payment history or "willingness to pay" | | | | include the mortgage principal, interest, taxes and |
| 4. Sufficient appraisal value, which shows the house is | | | | insurance, often abbreviated PITI. For example, if your |
| at least equal to the purchase price | | | | annual income is $30,000, your gross monthly income is |
| 5. In some instances, a cash reserve equivalent to two | | | | $2,500, times 28% = $700. So you would probably |
| monthly mortgage payments | | | | qualify for a conventional home loan that requires |
| Closing costs, or settlement costs. | | | | monthly payments of $700. |
| Are paid when the home buyer and the seller meet to | | | | Any expenses that extend 11 months or more into the |
| exchange the necessary papers for the house to be | | | | future are termed long-term debt, such as a car loan. |
| legally transferred. On the average, closing costs run | | | | Total monthly costs, including PITI and all other |
| approximately 2% to 3% of the house price. This | | | | long-term debt, should equal no greater than 33% to |
| percentage may vary, depending on where you live. | | | | 36% of your gross monthly income for conventional |
| Examples of closing costs are the loan origination fee | | | | loans. Using the same example, $2,500 x 36% = $900. |
| (if not already paid), points, prepaid homeowner's | | | | So the total of your monthly housing expenses plus |
| insurance, appraisal fee, lawyer's fee, recording fee, | | | | any long-term debts each month cannot exceed $900. |
| title search and insurance, tax adjustments, agent | | | | For FHA the ratio is 41%. |
| commissions, mortgage insurance (if you are putting | | | | Maximum allowable monthly housing expense |
| less than 20% down) and other expenses. Your | | | | 26% - 28% of gross monthly income - Conventional |
| mortgage professional will give you a more exact | | | | 29% of gross monthly income - FHA |
| estimate of your closing costs. | | | | Maximum allowable monthly housing expense and |
| Points are finance charges that are calculated at | | | | long-term debt |
| closing. Each point equals 1% of the loan amount. For | | | | 33% - 36% of gross monthly income - Conventional |
| example, 2 points on a $100,000 loan equals $2,000. | | | | 41% of gross monthly income - FHA |
| The more points you pay, the lower your interest rate | | | | When budgeting to buy a home, it is important to allow |
| will be. In some cases, you may be able to finance the | | | | enough money for additional expenses such as |
| points. | | | | maintenance and insurance costs. If you are |
| So How Much of a Mortgage Can You Afford? | | | | purchasing an existing home, gather information such |
| There are two basic formulas commonly used to | | | | as utility cost averages and maintenance costs from |
| determine how much of a mortgage you can | | | | previous owners or tenants to help you better prepare |
| reasonably afford. These formulas are called qualifying | | | | for homeownership. |
| ratios because they estimate the amount of money | | | | Homeowner's insurance or property insurance is |
| you should spend on mortgage payments in relation to | | | | another cost you will have to consider. The lending |
| your income and other expenses. | | | | institution holding the mortgage will require insurance in |
| It is important to remember that the following ratios | | | | an amount sufficient to cover the loan. However, to |
| may vary and each application is handled on an | | | | protect the full value of your investment, you might |
| individual basis, so the guidelines are just that -- | | | | want to consider purchasing insurance that provides |
| guidelines. There are many affordability programs, both | | | | the full replacement cost if the home is destroyed. |
| government and conventional, that have more lenient | | | | Some insurance only provides a fixed dollar amount |
| requirements for low- and moderate-income families. | | | | which may be insufficient to rebuild a badly damaged |
| Many of these programs involve financial counseling | | | | house. |