Determining what you can afford to pay for a home is the essential first step to buying a home.
The maximum Debt-to-Income ratio that your household expenses should not exceed is 43 percent of your gross income. Household expenses typically include property taxes, utilities, insurance, food, medical and dental, telecommunications, as well as any payments on outstanding loans, credit cards and your mortgage. Household income includes your salary and any dividends and royalties.
The ability-to-repay rule requires most mortgage lenders to make a good-faith determination that you are likely to pay back the loan. Lenders base their decision on documented income, debts, assets and other financial factors.
Financing a New Home
Before shopping for a home, find out about available financing. With a standard mortgage, the payment, interest rate and the term are fixed. Most standard mortgages offer 30-year or 15-year pay-off terms and are self-amortizing, which means that at the end of the term, all principal has been repaid. Alternative Mortgage Instruments (AMI) are loans in which at least one of the four components varies. The most common AMI is the Adjustable Rate Mortgage, which is typically paid out over 30-years with a variable interest rate. Customarily, the ARM interest rate begins low and periodically adjusts either up or down. The initial low rate, and therefore the lower monthly payment, enables the buyer to meet the income and debt-ratio requirements. Low down payments may also be associated with AMIs. Conforming Loans are less than $417,000 while a Jumbo Loan exceeds this amount. The down payment is the cash committed toward the purchase of a home, and the larger it is, the less one must borrow. For most loans, a down payment of 20 percent of the purchase price is generally required to avoid Private Mortgage Insurance (PMI). The purchase price less the down payment calculates the principal of the mortgage. Dividing the principal by the number of payments in a 30- year or 15- year mortgage and adding the interest determines the monthly house payment. Escrow money for taxes and insurance is added to the payments and are re-calculated annually.
Mortgages and Interest Rates
Interest rates fluctuate frequently, and vary from lender to lender. Interest on a 30-year fixed rate mortgage is likely to be different from that of a 15-year, and adjustable rate mortgages. Naturally, the higher the interest rate on your mortgage, the higher your monthly payments will be, and the more you will pay over the term of your mortgage. Lenders may allow buyers to “lock-in” or guarantee their rate for 30- or 60-day periods. However, there may be a fee. Since the amount of the monthly loan payment plays such a vital part in determining the size of the loan for which you qualify, you may wish to pay or get the seller to share some discount or buy-down points to lower the interest rate. And don’t forget closing costs that can be significant. Some costs are negotiable, so be sure to discuss this with your real estate agent and lender.
Special Mortgage Programs
Teachers, police officers, firefighters, government employees and first-time home buyers may qualify for special mortgage programs, although not all lenders can offer discounted rates. Seek pre-approval from your mortgage lender because it gives sellers a level of assurance that you can obtain a mortgage. Pre-approval requires the completion of a loan application and sometimes a fee. Note, however, that a pre-qualification is only an estimate of a mortgage that a prospective buyer might qualify for.
Looking for an established credit history, lenders will require a credit report from a credit bureau that has collected your credit history for the past 7-10 years. Some lenders may offer more flexible mortgage programs for people with limited or no established credit history. Credit reports document your financial history and reflect the amount of credit you have, the timeliness with which you pay your bills, if you have declared bankruptcy and other factors. To avoid delay or problems obtaining a mortgage, order a copy of your credit report before submitting your application. If you discover inaccuracies, contact the credit bureau and take steps to correct the errors immediately. The three primary credit reporting agencies are EquaFax®, Experian® and TransUnion®. Calculated using five factors – payment history, amount of outstanding debt, length of credit history, new credit, and sources of credit in use – your credit score is a ranking between 300 and 850 that many lenders use. The higher your score, the lower your interest rate may be.
First-time buyers can often obtain Federal Housing Administration (FHA) loans, with a down payment as low as 3.5 percent. The maximum amount of an FHA loan in Harris County in 2017 is $331,200 for a single-family residence. The FHA does not have an income cap, but applicants’ credit scores must be acceptable and their income sufficient to repay the mortgage. Go to www.fha.com. Homebuyer’s Assistance Programs educate first-time homebuyers about options available to them. Contact Houston Homebuyer Hotline at 713-522-4663.
Banks usually offer mortgages at very competitive rates, especially when homebuyers utilize other services. Be sure to ask them about their services and fees associated with different accounts, minimum balance requirements, ATM charges, availability of funds policy, on-line banking, direct deposit and other options to maximize your finances. Contact the Texas Department of Banking toll free at 877-276-5554 or go to www.dob.texas.gov for more.
Credit unions are not-for-profit financial cooperatives that are owned by their members, who often share something in common, such as where they live, work or worship. Credit unions are closely regulated and operate prudently. The National Credit Union Administration, a U.S. government agency, insures deposits of up to $250,000 per member.
Mortgage lenders require homeowner insurance on properties they finance, and generally, homeowners pay one year of insurance at closing. Insurance premiums, like taxes, can be included in monthly mortgage payments. Selecting an insurance company and determining coverage is up to the homeowner, and should begin when the home is purchased. An engineering survey may be required to determine the home’s susceptibility to flooding. Some insurance agents offer auto, health, and life insurance as well as homeowners insurance, and rates may be lowered if policies are bundled. Get several quotes to compare prices. Call the Texas Board of Insurance at 512-463-6169 or 800-578-4677. The board’s Consumer Helpline is 800-252-3439. Or visit www.tdi.texas.gov.
Title insurance protects the buyers and their mortgage company from a problem in the chain of ownership and conveyance, unpaid taxes or claims against a property.
Monthly Mortgage Payments
Most mortgage lenders prefer that monthly mortgage payments not exceed 28 percent of the purchaser’s gross monthly income. FHA Insured Loans require that monthly mortgage payments not exceed 31 percent of monthly income.