Sunday, February 13, 2011 -
By Relocation.com Staff
Can you REALLY afford that home mortgage?
That's a question mortgage companies are much more likely to ask now with thousands of homeowners facing foreclosure on homes they really could not afford in the first place.
If you are like most people looking to buy a new home and do not have the cash available upfront, you will need to borrow some or all of the cost. If you have the cash available to purchase the home outright, you may still want to borrow the money to take advantage of tax benefits like deductible mortgage interest.
But before you even approach a mortgage company, find out how much you can realistically afford to pay.
The mortgage company will want to ensure you can afford to make the monthly home mortgage payments and will generally only lend you the amount they believe you can afford. The lender will closely examine your financial situation to be sure of getting the money back -- with interest.
You may be uncertain about how much you can spend to buy a home. We'll give you a basic rule of thumb, and also discuss how the downpayment works.
Take your gross monthly income and multiply that by 0.28. If you're making $50,000 a year, your maximum monthly mortgage payment is $1,166 a month. There are many online calculators you can use to fine-tune this figure taking into account other debts you might have, but of course the mortgage company makes the ultimate decision about to whom they loan money and under what conditions.
Because of the credit crunch in mid-2008, the government has been tinkering with limits to make it easier for would-be buyers to qualify for mortgages – for example, Fannie Mae and Freddie Mac, government-sponsored entities that buy mortgages, said they would buy more expensive mortgages in an attempt to kickstart the mortgage market – so ‘affordability' might be in flux in the near future.
How Much Do I Need to Put Down?
Zero-down loans had been gaining in popularity as lending institutions got more comfortable with them, but they also helped fuel the recent surge in foreclosures because those people became more unlikely to pay off their mortgages.
So nowadays you will most likely need to put some money down. The lender feels that the more money you put down for the home the more likely you are not to default on the loan because you have equity in the home.
It is recommended that you put down about 20% or more of the cost if you have that amount of money available. This is known as 80% loan to value ratio (LTV). If you put down less than this you will be required to pay private mortgage insurance, which protects the lender in the event you default on the loan.
Under federal law the lender is required to cancel PMI once the LTV ratio reaches 78% or, in other words, when your mortgage amortized to 78% of the original value of the house. The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78% mark.
Some lenders may require this 20% to be put down in order to get a loan. You can be turned down for a loan if you are not able to come up with the 20% the lender requires. In some areas of the country such as the New York and San Francisco areas, where homes for even the first-time buyer are every expensive, 20% can be a large amount of money.
There may be times when you will be asked to put down more than even 20%.
Co-ops may require up to 60% of the purchase price. This is often a way for the board to weed out individuals it does not want in their building. Some people who are cash rich and feel uncomfortable owing money to anyone may be better off to put down as much as possible even though they will not benefit from the tax advantages of having a mortgage, and they lose that money to invest in other things, like stocks.
Making the decision on how much to put down depends on many things and there is really no right answer. Some folks feel comfortable with a 100% LTV ratio and other people feel very uncomfortable with an 80% LTV ratio. You may very well want to take advantage of not paying private mortgage insurance by putting down more than 20%. If you do not have the 20% upfront, you may wish to increase the number of mortgage payments each year to pay off the mortgage as quickly as possible, or to build up enough equity to avoid paying private mortgage insurance. Remember, the more money you put down, the less your monthly payments will be.
Some people feel that putting down less money has its advantages because any money left over can be invested in more profitable vehicles.