Purchasing A Home. The Role of the Mortgage Lender.

When you decide to buy you should first contact a mortgage lender. You should discuss why you want to do this and see if it makes sense. Unless you fit into one of the "special categories" of loans: VA, FHA, special Census Tract, First Time Homebuyer you are going to get a "conventional loan". Some areas, by their demographics, have a lot of these special case loans, some do not. The remainder of this discussion pertains to "conventional loans".

The purchase price that you will be able to afford will depend on 3 factors:

- your income and how much other debt you have. This will determine how large a PITI (principle, interest, tax and insurance) payment you can afford

- how much you have for down payment and closing costs and,

- your credit history.


You need to understand 3 terms to follow the rest of this:

1) loan-to-value (or LTV). This is the loan amount as a percentage of the purchase price or appraised value (whichever is less). If you are buying a $150,000 home with $15,000 down payment you have a 90% LTV.

Loans over 80% LTV require either PMI (Private Mortgage Insurance) or a combination of a 1st and 2nd mortgage which avoids the PMI. For "expensive" homes two other rules apply. PMI stops (in general) at $400,000 loan amount and as loan amounts get progressively larger either a lower LTV is necessary or you are going to get restricted to certain loan programs. In general,
we no longer do loans with PMI but instead do a combination first and second mortgage.

2) housing ratio, this is your total monthly housing expense (principle, interest, tax, insurance, and PMI and homeowners dues, f applicable) divided by your gross monthly income. Note "gross" not net. If you have a "W2" job your income is easy. If you are self employed please note you gross income is what you bring from your Schedule C onto line 12 of your 1040. Also, a 2 year history of consistent self-employment income is necessary

3) debt ratio, this is your total monthly obligations (PITI above) plus your monthly payments of your installment and revolving debt. Some details here: this would include child support, alimony or separate maintenance. Any debt with fewer that 10 months to go does not count. A debt such as a "buy furniture now make no payments until more than a year from now" does not count as long as there are 12 months to go without payments. The same goes for student loans.

We often see young couples "blow it" by buying a couple of nice cars. If you are spending 15% of your gross income on your auto loans you should make one of them a van because you will not be able to afford a house.

OK, Now What?

If you have excellent credit you can buy a home with 5% down and with housing and debt ratios as high an 38% for housing ratio and 44% for debt ratio. As your credit score declines your maximum LTV will decline and your ratios will have to be lower. If your credit is really lousy you should plan on having to put 20% down. If your credit is terrible you should wait several years until you can fix it before you purchase.

If you have good credit you may need a 10% down payment and ratios more like 35% housing and 40% debt ratio. Please understand that none of this is etched in stone. Compensating factors, such as a long time on the job or significant other liquid assets will enable higher ratios at a given LTV. You really need to talk with a mortgage broker to sort this out.

The best advice I can give young people just thinking about this isto keep absolutely perfect credit. Once you get out of college yourcredit score is like your SAT was before you got into college. Itis the key to opportunity.

Your income and credit will determine the size loan you can qualify for. You now need the cash to make it happen. You need cash for three things:

1) the actual "down payment"

2) closing costs. This is where a lot of people get misled. You need to cover your one time or "non-recurring "closing costs, your recurring closing costs: prepaid interest, insurance, impounds if there is PMI and potential pro-rated property tax

3) reserves. Your lender does not want to see a loan application showing that when you close the deal you will have $5.99 left in the bank.

They want to see 2 months PITI in reserve. Don't try to minimize this. Make sure that you get together all of the cash necessary to close.

Once you have determined what size loan you will be able to qualify for and where the money is coming from you and a mortgage broker can determine how expensive a home you can afford.

If you are planning on seeing Realtors and potentially making an offer it is essential that you get preapproved. Using our WWW site you can fill out the on-line application and we can prequalify you. Then you can walk into a Realtor's office with a letter stating that you can close a given deal. This will get the attention of the Realtor. It will get the attention of the seller, and it will mean that you can close quickly. This is very important for properties for which the seller has multiple offers. I have seen my client's offers accepted even though they were $5,000 less that other offers because they could close in 3 weeks. To some sellers time is more important that the extra money. This is especially true if they are buying another house and need the cash to close their deal.

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