Buyers Guide

Buying a home can be one of the most significant investments you make in your lifetime. Not only are you choosing a place to live, but you are also investing a large part of your assets in to your future. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. This page will provide you with detailed information to assist you in making an intelligent and informed decision.

How Much House Can You Afford?
House hunting begins at home - with planning. The first step toward buying a house is to determine how much home you can afford. Before you grab the road maps and hit the streets, you need to do a little "pre-qualification" planning. Simply, it's determining how much house you can afford to buy. Knowing your affordable price range will bring your house hunting into focus. Many lenders will send out all required verification and pre-approve you for a mortgage, allowing you the opportunity to negotiate as a cash buyer.

There are two numbers to consider when determining how much house you can afford. The first is the down payment and the second is monthly mortgage payments. Monthly payments include principal and interest on the mortgage loan, property taxes and insurance against fire and other hazards. These four costs are often abbreviated "P.I.T.I." (For some buyers and lenders, monthly housing costs may also include homeowner association dues, condominium fees and mortgage insurance.)

Qualifying For a Mortgage
In today's market an "affordable" home is generally measured in terms of how much a home buyer can afford to pay each month. A house hunter's first step is to set a housing budget, then go shopping for the house (price) and payments (P.I.T.I.) that fit that budget.
Even though there are several ways to qualify to buy a home, make sure the monthly payment makes sense for you. A current rule of thumb is that the monthly payment should not be more than 25-33% of gross monthly income. Restrictions will apply for smaller down payments.

So, How Much Can I Afford?
The key items are the amount of the down payment, interest rate, APR and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. Or a buyer may elect to invest 20 to 25 percent of the purchase price with a conventional loan and not be required to buy mortgage insurance. There are many different loan programs available and you should discuss what would be appropriate for you with whichever lender you choose to work with.

Sources Of Your Downpayment
The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not so obvious sources, especially for first time home buyers. These could include gifts, and retirement plans that allow a first-time buyer to "borrow" from.

Gifts
If you are having trouble saving enough money, many lenders will allow you to use gift funds for the down payment--as well as for related closing costs. The gift may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your house, ask your lender about their policies regarding gifts.

Investments and Equity
Other sources of funds may include: A home equity loan from a parent or relative (given as a gift), shared equity or profit sharing, cash value of a life insurance policy, traditional stocks and bonds, and borrowing from a retirement fund. All of these options must be carefully considered before making any final decisions.

Reducing Your Downpayment
Mortgage Insurance can reduce your down payment if you prefer a conventional loan. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, and allows the lender to approve a larger mortgage amount.

In a common approach, you'd pay an initial amount at closing (often one percent of the mortgage if your down payment is 5 percent, 1/2 of 1 percent if you put down 10 percent). Then, included in your monthly payments for your mortgage, you would pay an additional one-twelfth of 1/4 percent of the mortgage balance. This payment will usually continue until dropped at the discretion of the lender, unless a stop point is specifically written into the deed of trust, such as accumulating a 20% equity. Ask your lender for specific figures for any loan program you are considering, as the amount of mortgage insurance varies by the type of loan.

There are also programs available where little or no down payment is required--ask your lender about these other options and whether they may be right for you.

Determining Your Housing Budget
Generally, lenders figure that the home buyer shouldn't pay more than 28-38 percent of gross income for P.I.T.I. payments, or 36-38 percent for both P.I.T.I. and monthly debts combined. This might be a little more or a little less depending on other outstanding long term debts (more than 10 months), alimony/child support payments, number of children and their ages, and other household budget items.

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