At this stage, you can begin looking into whether you would qualify for a mortgage loan given the price range of homes that you like and your intended down payment. You also need to make a preliminary decision about the time period of the loan and the choice between a fixed or variable interest rate (topics covered later in this chapter). One goal is to find the lowest APR for loans available to you. A good place to start is with the financial institutions in which you have your checking and savings accounts. In addition, you can search for low-rate loans at www.bankrate.com. Other helpful information can be found at the websites for the U.S. Department of Housing and Urban Development (www.hud.gov/buying/) and the Federal National Mortgage Association (www.homepath.com). Once you have an idea of the interest rate you will pay, you can consult lenders to determine whether you would qualify for a mortgage in the amount you would like. Lenders use two rules of thumb to estimate the maximum affordability of housing expenses: the front-end ratio and the back-end ratio.
- The front-end ratio compares the total annual expenditures for housing (the principal and interest on the mortgage plus the real estate taxes and insurance) with the loan applicant’s gross annual income. Generally, the total annual expenditures should not exceed 25 to 29 percent of gross annual income. Applying a 28 percent front-end ratio, a young couple with a combined gross annual income of $73,000 could qualify for a mortgage requiring total annual expenditures of less than$20,440 (0.28 $73,000), or $1703 per month
- The back-end ratio compares the total of all monthly debt payments (for the mortgage, real estate taxes, and insurance, plus auto loans and other debts) with gross monthly income. Generally, lenders require that monthly debt payments do not exceed 33 to 41 percent of gross monthly income. Applying a back-end ratio of 38 percent, the same couple could qualify for any loan that does not result in total monthly debt repayments exceeding $2311 [their monthly income of $6083 ($73,000 12) 0.38].
Many young couples base their ability to afford housing on their combined incomes. This locks them into a full-time, dual-income lifestyle once they have purchased a home. Family obligations may later disrupt their ability or willingness to continue that lifestyle. They might be better off gauging housing affordability on just one income or on part-time work for the second income. About one-half of all mortgage loans today are arranged through a mortgage broker. A mortgage broker is an individual or company that acts as an intermediary between borrowers and lenders. In other words, a broker helps lenders find borrowers and borrowers find lenders. Either the lender or the borrower may pay the fee charged by the broker. If the lender pays this fee, the broker legally represents the lender. If the borrower pays it, the broker legally represents the borrower. Thus, if you want the broker to work to find you the lowest possible rate, you should be prepared to pay for the service.
Moderate- and low-income families often find it difficult to save the 20 percent down payment required by lenders. FHA- and VAinsured loans (discussed earlier in this chapter) provide some opportunity for low down payments but are not available to all borrowers or on all homes. Other programs have been developed for low-income buyers and people buying homes for the first time. Lenders in your area can provide you with information about programs that target these special-needs groups. Through such programs, it may be possible to buy a home with a low (or no) down payment and at a low, government-subsidized interest rate.
Search for a Home Online and in Person
Searching for a home requires a commitment of time. You do not want to be impulsive when you will be committing yourself to hundreds of thousands of dollars of expense. You can find housing in any number of ways, but the Internet has revolutionized the home search process. You can narrow your choices to excellent prospects without ever leaving home. Simply go to realtor.com and search for homes in your community. You will be able to see floor plans, photos, descriptions of features and condition, and price-related information. Once you have found a home you would like to see, you can contact the seller or the real estate agent handling the property
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