Nov 012014
 

Can you afford mortgage financing?

Mortgage financing

Despite what on-line calculators tell you, to know for sure you can afford a new home, and the mortgage financing that goes with it is going to take a little work on your part.

Calculating your financial obligations:

To start with, you need to come up with an accurate assessment of your current expenses and financial obligations. Below is a list of expenses that should be included in your assessment:

Rent
Renters insurance
Health insurance
Car loan payment or lease
Car maintenance
Car insurance
Electricity
Natural gas
Water
Garbage
Security
Landscape maintenance
Swimming pool service
Natural gas
Cell phone
Internet access
Cable TV
Gas
Entertainment
Child support
Student loans
Credit card debt repayment
Restaurants
Clothing
Dry cleaning
Membership dues
Property taxes
HOA fees
School fees
Day care
Groceries
Toiletries
Hairdresser
Planned savings
Future estimated cost of proposed mortgage payment
Future estimated cost of new home maintenance
Future estimated cost of new home CDD, HOA or any other expense

Calculating your income:

Your next step is to total up all of the income that you receive from all sources, such as:

Salaries and wages
Tax return verified self-employment income
part time income with a two-year history
interest
dividends
disability
retirement or pension
Alimony or Child Support
Automobile allowances
Public assistance
Boarder income
Foreign income
Foster care income
Social security
Tips

If the total of your monthly expenses is less than your monthly income, then you are most likely able to afford your desired mortgage.

Lender formulas:

Having completed your income and expenses assessments you are now able to start talking to a lender about how much can be loaned to you to buy a home. Lenders use two different formulae which are based on a ratio of your debt and expenses to your income.

Their first formula is called the front-end, or housing ratio. It calculates what your total housing mortgage debt (Principal, Interest, Taxes, Insurance) (PITI) and condo fees are as a percentage of your gross monthly income. They want to see that percentage to be no more than 28- 30 % to qualify for conventional financing.

Their second formula is called the back-end or overall debt ratio. It calculates what your total housing mortgage debt (your revolving monthly payments that appear on your credit report) are as a percentage of your gross monthly income. They want to see that percentage to be no more than 40 % to qualify for conventional financing.

The above qualifying ratios vary for different loan programs and can sometimes be stretched.

For instance, lenders might allow a back-end ratio of 41% if you are a 1st-time home buyer. According to FHA guidelines, that would include any person who has not owned a principal residence in three years. Other loan programs have different criteria in order to qualify.

Calculators:

Here is a very useful and easy to use mortgage affordability calculator provided the Federal Housing Administration.
Also, here is a calculator for borrowers who want to know whether they can afford a
given-priced house AND for borrowers who want to know how much house they can afford.
The calculator displays the cash and income required to qualify, and the maximum debt service allowed, to purchase a house at a specified price. It also shows how much house you can afford, and how it is calculated.

Buying costs:

When considering purchasing a home, you have to take into consideration your buying costs, which differ depending on location, city, county and state. Below is a list of typical buying costs and who charges them:

Credit report fee charged by the lender
Attorney fee if an attorney is attending to the closing
Home and pest inspection fees ordered and charged by the lender
Discount points charged by the lender to reduce the interest rate of your loan
A fee for a lender ordered appraisal
A loan origination fee charged by the lender
A survey fee for a lender required survey to identify property lines
Title search fees charged by the title insurance company to research the title for issues
Owners title insurance to protect a buyer against title defects discovered after closing.
Lenders title insurance and endorsements to protect the lender
Amounts required to be held in escrow to cover prepaid taxes and insurance premiums
A public records recording fee charged by a city or county
An underwriting fee charged by the lender
Home Owners Association dues and transfer fees
First year’s flood insurance fees if applicable
State documentary stamp and intangible taxes on the mortgage

Lender estimate and settlement statement:

All of the above expenses can amount to between 2% – 5% of the purchase price of the home
In order to know exactly how much it is, lenders are by law required to provide buyers with an a good faith estimate within three days of applying for a loan.

In addition, the lender must provide a buyer with an accurate settlement statement three days before closing.

Please also see our information about the One-time close construction loan as well as the Energy Efficient Mortgage (EEM) and other useful loans on our Green Home Financing page.

Hopefully, the above information has been helpful to you. The most important thing is to take your first step, which is to come up with an accurate assessment of your current expenses and financial obligations. You will then have an idea of whether you can afford mortgage financing, and if so, take the next step, which will be to start talking to a mortgage loan officer about a mortgage loan that will be right for you. Please also visit my mortgage loans page for more information.

Our services are always FREE to Buyers, and we contribute $500 towards closing costs if you buy through us, as well as $250 toward our Switch to Green, Switch it Forward Fund, to help fight poverty and climate change.

Let us show you how we can be Your Green Dream Team to help you to Live in a High Performance Green Home, that will Save You Money and help you to Pay Your Mortgage Off Years Earlier, while at the same time, live in a home that is Healthier, More Comfortable, Safer and Kinder To The Earth.

Thank you for visiting. Please leave a comment below and then check out the rest of our BLOG. We look forward to making Green Home living your reality.

Marius J Smook – Licensed Real Estate Eco-Broker, LEED AP for HOMES, Home Energy Rater.

 November 1, 2014

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