Posts Tagged ‘home loan’

Can I afford to buy a home?

There are a couple of ways to approach the question “Can I afford to buy a home”? One way is to see it from they eyes of a lender. Most lenders agree on the following guidelines:

• Your debt-to-income ration can be no more than 36%
• A housing payment-to-income ration of no more than 33%, preferably around 28%
• Good Credit history
• Required Down payment or around 5%

If you meet all of those guidelines then you will have a good shot at getting a home loan from a lender.

However from your own personal financial situation you may get a different answer. From my own personal experience most lenders will offer to lend you more money than you can really afford. Lenders don’t factor other spending habits into the equation such as entertainment budgets, giving to charities, medical expenses and many other budgeted expenses. They also do not factor in future expenses such as retirement, college, weddings, etc.

Additional expenses will include possible home improvements you want to make once you move into your home. Paint, blinds, new carpet and an extensive list of improvement will probably cross your mind.

Before you decide how much money you spend on buying a home you should do a detailed budget analysis. Find out exactly how much money you are spending each month and how much you are saving. Don’t forget to include all of you and your spouses’ income as well as all your expenses. Also, include room for other future expenses that I mentioned earlier. Once you find your target amount find a good mortgage calculator online that will tell you how much house you can afford.

Once you have all these numbers calculated give it a test run. For the next three months pretend like you have purchased your home. Instead of actually paying the house payment put this money into savings. Not only will it inform you that you can afford a house, but it will give you additional money to pay down on the home or to purchase those possible improvements once you move into your new home.

So, if you are wondering if you can afford to buy a home use the lender guidelines as a starting point, follow up with a detailed personal budget analysis, do a test run and finish off with even more research.

Mortgage Questions

Some of the most commonly asked mortgage questions.

When it comes to buying a house you want to ensure you follow all the rules and do your homework. Buying a car may be a big financial decision however, for the average person, signing your name on a mortgage will probably be the biggest financial decision you will ever make. Below are a list of the most common questions you should know the answer to before you sign the mountain of paperwork. I am going to start this series of posts and over the next several months answer each of these mortgage questions.

• Can I afford to buy a home?
• How much money should I spend on a home mortgage?
• What are the differences between mortgage pre-qualification, pre-approval and final loan approval?
• What first-time buyer programs are available?

• What types of mortgages are available and which should I choose?
• Can I use my IRA retirement funds as a down payment on a home?
• Should I pay points on my mortgage?
• I have poor credit are there still options for a mortgage?
• What are front and back ratios?
• Is it still possible to get a loan with no money down?
• What is PMI (Private Mortgage Insurance? Why do I have to pay it?
• I know it used to be simple to get a mortgage? Is it still that easy?
• Can I take out a second mortgage and use that as a down payment for the first?
• Should I pay extra on my mortgage each month?
• Does it matter how long I have been employed? Will this effect my chances of getting a mortgage?

Once I have answered all these mortgage questions I will open the post up for comments. You can ask your own mortgage related questions and I or members of the blog will give the best answer we can. Please note I am not a professional or have any qualifications in this field, everything you read here is my personal opinion.

Should I Stop Paying My Mortgage?

A record number of foreclosures have hit the banks in the past couple of years and just when the banks start to see relief more foreclosures pile up everyday. Number 8 on the list of highest foreclosure rates in the United States is Michigan. Today I read an article from Michigan Mortgage Attorney . They ask the question “Should I stop Paying my mortgage?”

It’s very tempting to stop paying your mortgage especially if you are in the situation that many Michigan home owners are in today. House values in the United States have plummeted in the past two years. Many home owners owe much more than their house is actually worth and there is no relief in the housing value market in sight. Many home owners owe 2 or 3 times more than their house is actually worth. It seems like they are fighting a losing battle with their mortgage. Should they just walk away?

I agree with MichiganMortgageAttorney.com in the fact that I don’t they it’s the right thing to do. If you can pay for your mortgage then you have an obligation to fulfil the promise you made to the bank or mortgage company. When you purchased your home you signed a legal contract stating that you would pay x amount of dollars over then next x amount of years. The bank or mortgage company in turn trusted you to fulfil your obligation.

I do however realize that times are tough and sometimes paying your mortgage payment isn’t an option. There are other alternatives to paying for your home other than just walking away. Many banks and mortgage compnies are very willing to work with interest rates and financing terms so you can keep your home and fulfil your mortgage.

If you have not yet purchased a home please keep this information in mind when signing on the line for your mortgage. Make sure all your personal finances are in order and always have a backup plan. Your mortgage is probably the single most important financial decision you will make so make sure you are ready to take the leap.

Lock in an interest rate for a home loan

It is important to lock in your interest rate at the correct time. Good timing on an interest rate lock can save you thousands of dollars. Interest rates change daily so the longer a lender locks in a rate, the more risk that they have the market will move against them. Therefore you will have to pay extra to have a lender lock in a rate for a longer period of time.

Still wondering what it means to lock in an interest rate? When you lock an interest rate you are guaranteed to get that rate no matter how the market performs. If you lock an interest rate in today that’s good for 45 days then no matter how much interest rates rise you are still guaranteed the lower rate.

It would be a good idea to lock in interest rates if the trend in interest rates is rising. This will give the lender time to close the loan without worrying about rising rates. If the trend is down you would want to float your interest rate to take advantage of falling interest rates.

Finding the right time to lock a rate is a game. Even in a stable market it’s a risk to not lock a rate. Because of the highly volitle market interest rates can rise drastically even in the course of a day. Paying the lock fee will ensure you have ample time to close the loan and not have to worry about a drastic rise in interest rates.

How Construction Loans Work

The simple definition of a construction loan is a loan used to build a home. A construction loan is very different from a typical mortgage loan. A construction loan may sometimes be more difficult to acquire than a traditional home loan, because there isn’t anything to be used as collateral for the loan. This in turn usually also means slightly higher interest rates on a construction loan.

Construction loans still offer different loan types as well as different financing terms. Typical construction loans include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and interest-only loans. You can also get a short term loan usually one year while the house is under construction and then refinance into a lower interest rate term once construction is complete. This however requires two loan closing, in turn costing you two sets of closing costs. A more popular construction loan today is known as a construction to permanent loan. This type of loan only charges you 1 set of closing costs.

Before you get a construction loan you will have to get pre-qualified for the loan just like you would a regular mortgage loan. Also, just like a typical mortgage the better your FICO score and the more equity you have in the land you are building your home on will determine what type of interest rates and how much you can borrow.

Another thing to understand about construction loans is that you have to start making payments on the loan before your house is completed. This can be done by simply making the monthly payment or by setting up an interest reserve fund. An interest reserve fund basically pays your monthly payment for you while your land is being built. It’s not a free service however, this amount is added back into the loan. Basically the bank estimates how much your interest will be over a year and adds that amount onto the loan. This does however help the consumer if they are paying rent or another house payment while their home is being buit.

Mortgage preapproval doesn’t mean you can afford it

You should always get a mortgage preapproval from a lender before shopping for a home. A pre approval letter lets the buyer know you are a serious buyer. More importantly it gives you a general price range of the houses you should be considering. However, just because you get a preapproval from a lender for a certain amount of money doesn’t necessarily mean you can afford that much house.

Many times borrowers will get pre approved for a certain amount of money, but buying a home at this price may stretch your budget too thin. There are many budget items that a bank doesn’t look at when deciding to give a preapproval amount. For example, I just used a preapproval calculator online with my own personal finances. I would be preapproved for a home loan of $456,000. Currently our home is less than half this amount and we don’t really have a lot of money left each month to save.

Many things the lenders don’t consider when giving a preapproval mortgage amount include daycare, enertainment, clothing, groceries, tithe or donations, etc. Sure most of these things aren’t completely necessary but you will need some type of budget for these items.

You should always get a mortgage preapproval before shopping for a loan, but do a detailed budget to find out how much home you can really afford. Part of the problem with the current credit and bank crisis is because of what I have just discussed. Don’t leave it up to someone else to do your homework, do your own research. After all no one else knows your money better than you!

Interest Only Mortgage Loan Information

Interest only mortgage loans usually have an interest only period of 5 to 10 years. During this time period the borrower only has to pay the interest on the loan. After the initial interest only time period the remaining balance is amortized for the remaining term of the loan. For example if the initial loan was a 30 year interest only loan with a 10 year term of interest only payments the remaining balance would be amortized over 20 years.

An interest only loan allows for lower payments at the front part of the loan, freeing up cash for other purposes. Many times borrowers take out this type of loan because they are expecting a raise in the near future and will be able to afford higher payment later.

The pros of interest only home mortgage loans:

• Lower monthly payments during the interest only period
• Free up cash to save for retirement
• Still get the benefit of tax savings

The cons of interest only home mortgage loans:

• Risk of declining value of real estate and being upside down at the end of the interest only period
• Higher payments after the interest only period
• Little or no equity in your home during the initial interest only period
• Higher interest rates because they are riskier loans for the lender

If used properly you can find some advantages in interest only loans; however with the poor money management skills of most Americans it’s not the best idea. If you are planning on using an interest only loan to purchase a home you can’t really afford now, it’s not a good idea. Even though you may expect more income later in life it’s not a guarantee. Research and plan very carefully before taking out an interest only loan.

Conventional loan

Conventional loan defined
 A conventional loan is basically any mortgage loan that is not insured by the federal government or the FHA (the Federal Housing Administration). A conventional loan was the first type of traditional mortgage loan made by lenders. It was basically a fixed rate mortgage for the entire period of the loan. Lenders basically loaned the money to borrowers and the loan was kept open until the loan was paid in full. It was a great way for the borrower to create a relationship with the lender, but often times weren’t the best financial move for lenders. If interest rates rose, lenders were stuck receiving a lower return rate on their money.

Types of conventional loans
There are many types of mortgage loans that are considered conventional loans. A few examples include conforming loans, nonconforming loans, and jumbo loans. A conforming loan is a mortgage loan that conforms to GSE guidelines. Nonconforming loans fall outside the GSE guidelines because of bad credit, lack of collateral backing the loan, or the loan is over a certain amount of money. Finally, a jumbo loan is a loan that large to be financed by normal mortgage trading companies. This amount is currently just over $400,000.

Pros and Cons of Conventional Loans

Pros

• Lenders will be more flexible with lending fees
• The lender may take into consideration other collateral other than the property being mortgaged
• A lender may consider other personal property included in the property as part of the home value
• Appraisals will be more lenient
• The lender may self insure the loan
• A higher interest rate may be considered in exchange for lower closing costs

Cons

• Usually require larger down payments
• The lender sets their own interest rates
• Though lenders can be flexible with lending fees they can also charge more
• There may be some fees associated with paying off the loan early
• Require PMI if the LTV (loan to value) is greater than 80%
   

Other mortgage loan options other than a conventional loan

FHA loans are non-conventional loans. FHA loans are insured by the federal government and have many advantages over conventional loans. FHA loans usually require lower down payments, have more flexibility when it comes to the borrowers credit scores, and have lower PMI or private mortgage insurance.