Buying a home is the embodiment of the American dream. However, that wasn’t always the case: In fact, before the 1930s, only four in 10 American families owned their own home. That’s because very few people had enough cash to buy a home in one lump sum. And until the 1930s, there was no such thing as a bank loan specifically designed to purchase a home, something we now know as a mortgage.
Your debt to income, or DTI. Is the amount of monthly debt payments you have compared to your monthly income. Most mortgages will allow a maximum DTI of 41%, ideally you will want a DTI ratio of no higher that 36%. See how much house you can afford using our calculator. Try not to stretch yourself too thin, if you have a high DTI you will be more likely to miss mortgage payments if an emergency comes up.
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Many real estate agents want you to be pre-qualified for a loan before they will start to work with you. The mortgage pre-qualification process is fairly simple, usually just requiring some financial information such as your income and the amount of savings and investments you have. Once you are pre-qualified, you will have a better sense of how much you can borrow and the price range of the homes you can afford.
Typically offered by lenders, loan modification programs are designed to make your mortgage fit within your budget. If your income has decreased due to layoff, reduction in hours, reduction in hourly pay, or emergency expenses, you can go to your lender and explain why you can't pay the mortgage. If they offer loan modification programs, they can reduce their interest rates, keep your payment within a certain percentage of your income, increase or decrease the length of the loan, or negate certain penalty fees. Loan modifications are rarely sweeping, one-size-fits-all type deals. They take time to set up, and only provide indirect assistance by modifying your debt. They don't put cash directly into your pocket. For this reason, they're not useful as emergency mortgage assistance, but they can help if you're struggling just a little bit.
The good news for today’s FHA borrowers is that roughly 3,000 zip codes got a 7-percent hike in FHA loan limits this year. Now homebuyers can borrow up to $314,827, an increase from last year’s $294,515. In more costly areas, loan limits rose to $726,525 from $679,650. These higher limits offer buyers access to a bigger piece of the market, especially as home prices continue to climb upwards.
It is important to find a mortgage lender who offers a wide variety of mortgage programs. If your lender only offers a limited range of programs, they may lock you into a suboptimal mortgage when there would be better options available for your situation elsewhere. Check to see if your lender offers programs like FHA loans or VA mortgages before moving forward with their services.
Mortgages will require mortgage insurance if you have less than a 20% down payment. PMI is between 0.35% – 1.0% annually depending on the type of mortgage program you choose. FHA loans PMI is 0.85% of the loan amount, and is required for the life of the loan. Conventional mortgage PMI is 0.51% and is required until the loan balances reaches 78% LTV.
The Home Affordable Foreclosure Alternatives (HAFA) program is for borrowers who, although eligible for the government Home Affordable Modification Program (HAMP), are not able to secure a permanent loan modification or cannot avoid foreclosure. HAFA provides protection and money to eligible borrowers who decide to do a Short Sale or a Deed-in-Lieu of Foreclosure.
The mortgage industry standard is a 20% down payment. However, you may be able to get a conventional mortgage with significantly less money up front -- as low as 3% of the purchase price in many cases. Specialized loan types, such as VA and USDA mortgages require no down payments at all for those who qualify. The point is that while a higher down payment will lower your monthly housing costs, you may be able to get into a home with less money in savings than you think.
On the other hand, if you know you will be selling in the not-too-distant future, the lower interest rate that comes with an ARM might make sense. Even if rates jump in a few years, you’ll be selling anyway so it won’t impact you. You can also select a hybrid ARM that is fixed for a certain number of years (3, 5, 7 or 10) then adjusts annually for the remainder of the loan. The risk with an ARM is that if you don’t sell, your payments may go up and you may not be able to refinance.