There are many alternatives to consider when selecting a mortgage for your new home.
QUALIFYING GUIDELINES:
Most lenders link the amount of the mortgage they'll offer to two key credit evaluation ratios. The first is the monthly housing cost-to-income ratio. As a general rule, conventional lenders will require that your monthly mortgage payment (consisting of principle, interest, taxes and insurance - PITI), and any other related fees (condominium assessments, home owner's association fees, etc.) not exceed 25% to 28% of your gross monthly income.
On certain types of loans, such as fixed-rate mortgages that require a large down payment, lenders will increase this to 33%. However, the 25% to 28% housing cost standard is used for most conventional (non-FHA or non-VA) loans. FHA and VA lenders use different qualifying criteria. The FAH, for instance, allows your "housing costs" (including PITI, utilities and maintenance) to equal 29% of your gross monthly income.
The second item that lenders focus on is your total monthly debt, including your new monthly house payment and all other installment-type debts, such as car loans, revolving charge accounts and personal debts. The general rule of thumb is that your total installment debt should not exceed 33% to 38% of your gross monthly income.
You will find that the FHA and VA measure the ratios somewhat differently from conventional lenders. The ultimate result is that there is a limit on the size of the loan any lender will grant you.
OTHER FACTORS:
Credit history: Your repayment history on all types of previous debt will be evaluated. The better this history is, the more comfortable the lender will be with a larger loan.
Possessions and assets:
These include everything from bank accounts to autos to stocks.
Employment history:
Factors such as length of employment, steady growth in rank and earnings and potential for additional earnings, (salary increases, commissions or bonuses, etc.) will be taken into account.
Closing / settlement costs:
Lenders also consider the expected closing or settlement charges on the loan. These are usually expressed as a percentage of the mortgage amount. If you don't have the ability to pay all related fees, the maximum loan amount for which you qualify may be deducted.
MORE HOUSE FOR THE MONEY:
Certain mortgages can increase your buying dollar. Most of these mortgages are structured to keep your monthly payments low for the first few years of your mortgage. Because your initial debt is lowered, you qualify for a larger loan amount.
The most popular are adjustable-rate mortgages (ARM). ARMs can often put you in a more expensive home on your current income than can a traditional fixed-rate loan. The monthly payment on an ARM can vary throughout the term of the mortgage, with certain limitations. Their first change can occur when the introductory rate period runs out. Depending on the ARM you choose, the first rate adjustment could jump by two percentage points or more.
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1. Check out the annual and life-of-loan rate adjustment caps. They are commonly two and six percentage points, respectively. That means that in any given rate-adjustment period, on an ARM, the rate could rise no more than two percentage points. Over the entire life of the mortgage, it could rise no more than six points.
- 2. Calculate the worst case scenario before choosing an ARM. If the rate on your mortgage were to rise to 15%, could you handle the monthly payments?
- 3. Be sure you understand how the future rates will be affected. Does the index (the standard your ARM is tied to) rise and fall dramatically (like short-term US Treasury note), or does it move more slowly (like the cost-of-funds index)? Is the margin (the amount added to the index to cover the lenders cost and profit) high, or can you find a lender that is charging less?
All these factors will help you determine whether to maximize your mortgage power and buy a more expensive house, or compromise and buy a little less house with more conservative fixed-rate loan.
OTHER OPTIONS:
Buy-downs:
An alternative to an ARM is a buy-down on a fixed-rate mortgage. Buy-downs are rate subsidies paid for by the seller or the borrower. For example, a seller may offer you an 8% fixed-rate mortgage in a 10% fixed-rate market. To accomplish this, the seller will pay the lender the 2% difference to subsidize the rate for the expected term of the mortgage. Although the 8% rate may not be as low as that of an ARM, many buyers prefer the buy-down because they know exactly how much their payments are going to be over the life of the mortgage.
Graduated-payment mortgages:
(GPM) In the first year, you pay your lowest rate (say, 7%). In the second year (the next step), your rate may jump to 8%. In year three, the rate may rise to 9%, where it will remain for the term of the loan. This process arranges the timing of your payments, keeping them low in the early years to better enable you to qualify, then raising them enough in later years to restore the unpaid interest during the early low-rate period.
Be aware of the possibility of negative amortization in most GPMs. That means building up greater debt to pay for the lower-rate years. For example, an $85,000 loan balance might increase to $90,000 before you begin to pay off the principal on your mortgage. Negative amortization GPMs aren't for everybody, but they can help you obtain more home with your present income.
Your best source of information on who's offering what is the local mortgage market is your local REALTOR. Shop the market and obtain quotes from local mortgage bankers, mortgage brokers, savings and loan institutions and commercial banks.
DON'T GIVE UP
What if a lender rejects your application for a loan? It doesn't always mean you cannot obtain a loan. It is possible that you are talking to the wrong lender. Submit the same application on the same house to a lender whose customer profile or underwriting standards are different, and you may find a different result. Good luck!
Show Low Office Randolph Tenney, Broker 60 South White Mountain Rd. Show Low, Arizona 85901 Office: (928) 532-1111 Toll Free: (800) 237-6230 Email: info@gmactenney.com |
Pinetop/Lakeside Office Mark Rodenborn, Branch Manager 1413 E. White Mountain Blvd. Pinetop, Arizona 85935 Office: (928) 367-3100 Toll Free: (800) 422-6812 Email: info@gmactenney.com |
Snowflake/Taylor Office Troy Goodwin, Manager 1300 S. Main St. Snowflake, Arizona 85937 Office: (928) 536-5600 Toll Free: (866) 297-0143 Email: info@gmactenney.com |
Holbrook Office Yvonne Larson, Branch Manager 1100 W. Hopi Dr. Holbrook, Arizona 86025 Office: (928) 241-1229 Email: info@gmactenney.com |