Find out How Much Mortgage You Can Afford
You can save yourself a lot of wheel-spinning if you take a minute to figure out how much mortgage you can afford. Generally, a lender will want your monthly mortgage payment to total no more than 31% of your monthly gross income (that's your monthly income before taxes and other paycheck deductions are taken out.) For those borrowers who qualify under FHA's Energy Efficient Homes, the monthly mortgage payment can total 33% of your monthly gross income. You also need to consider current loan interest rates. The lower the interest rate, the more expensive the home you'll be able to afford. Follow our tips and use these simple calculators to see how much you can afford in a mortgage payment.
Remember: Shop, Compare, Negotiate
Before you start looking at homes, you need to have some idea of what you can afford. It can save you much time and trouble by making certain you are looking in the correct price range.
There are three main factors that will weigh into how much home you can ultimately afford:
- your monthly income (before taxes);
- long-term debts;
- cash you can accumulate for a down payment and closing costs.
When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal. Your local newspaper and the Internet are good places to start shopping for a loan. You can usually find information both on interest rates and on points for several lenders. Since rates and points can change daily, you'll want to check your newspaper often when shopping for a home loan. But the newspaper does not list the fees, so be sure to ask the lenders about them.
The Mortgage Shopping Worksheet that follows may also help you. Take it with you when you speak to each lender or broker and write down the information you obtain. Don't be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal.
Credit Problems? Still Shop, Compare, and Negotiate
Don't assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders.
If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don't assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to shop around and negotiate the best deal that you can.
Whether you have credit problems or not, it's a good idea to review your credit report for accuracy and completeness before you apply for a loan. To order a copy of your credit report, contact:
Equifax: (800) 685-1111
TransUnion: (800) 916-8800
Experian: (888) EXPERIAN (397-3742)
Fair Lending Is Required by Law
The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant's income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of religion, race, color, handicap, sex, familial status, or national origin.
Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.
Obtaining Information from Different Lenders
Several types of Lenders can offer you different Home Loans. Commercial banks, thrift institutions, credit unions and mortgage companies. You may get different prices from each Lender Company, so remember to research for the best offer available. Mortgage Broker can also get you a home loan. They usually make transactions instead lending the money directly (brokers are the "middle man" between you and the lender). You can contact more then one broker and see who will find you a better mortgage loan program.
When you close a deal with a Lender Company, make sure that all fees (including the broker's fee) are included, so ask your broker what is his compensation and be prepared to negotiate with him and also with the lenders for a better price.
Find Out About All Important Cost Information
You should ask several brokers or lender the information about all the mortgages available. Ask about the down payment to see if you can afford, as well all the fees and costs included in the loan. The interest rate and monthly payment information is not enough. Compare the information about loan term, amount and type. Each lender or Broker should provide you detailed information about the loan. Below are some important information you should know from your lender or broker:
Mortgage Loan Rates
Find out from your broker or lender if the interest rates quotes are the lowest at the moment. If they are adjustable or fixed. Remember that monthly payment can go up if adjustable rate loans go up. Find out how your rate and loan payment will vary if the rate quoted is for an adjustable-rate loan, including whether your loan payment will be reduced when rates go down
Ask about the APR (annual percentage rate). It takes into account broker's fees, points, credit charges and of course, the interest rate.
The interest rate can contain points (lender's fees or broker's fees), normally the lower the rate the more points you pay.
Research on the Internet or local media about rates and points offered in the market.
Points should be quoted to you as a dollar amount (rather than just as the number of points) so you'll really know how much you will have to pay.
Lot of Fees are involved in a Home Loan such as broker fees, underwriting or loan origination fees, closing costs settlement and transaction fee. An estimate for its fees should be provided by each broker or lender. Many of these fees are negotiable.
When you apply for a loan some fees (such as application and appraisal fees) are paid and others are paid at closing. Sometimes, to pay these fees, you can borrow the money needed , but this will increase your loan amount and final costs. "No cost" loans usually involve higher rates.
Find out what each fee includes. More than a few items may be embedded into one fee.
If you do not know any fee, ask for an explanation!