Lenders have developed a formula that says you can afford a house worth about three times your total (gross) annual income. Don't rely solely on this formula, however -- it's much safer to look at your own budget, and figure out how much you have to spare and what the monthly payments on your new house will be (not just on the mortgage -- factor in taxes, insurance, maintenance, remodeling plans, and more).
According to institutional lenders, you should make all your monthly payments -- toward your house as well as other debt obligations -- using no more than 28% to 44% of your monthly income. In other words, if your monthly income is $2,000, the lender would want you to pay no more than $880 (.44 x $2,000) toward all your debts.
For a sneak peak at how much of a mortgage you'll be able to qualify for, see Nolo's calculator on qualifying for mortgages.
Check Your Credit History
When reviewing loan applications and making financing decisions, lenders typically request that the credit bureaus reporting your file -- Equifax, Experian, or TransUnion-- provide your credit score (also known as your FICO score). This seemingly mysterious number represents a statistical summary of the information in your credit report, including things like your history of paying bills on time and the level of your outstanding debts.
The higher your credit score, the easier it will be to get a loan. A score of 730 is considered a minimum for conventional loans these days.
If you routinely pay your bills late, expect a lower score, in which case a lender may either reject your loan application or insist on a very large down payment or high interest rate (to lower its risk). For more information, see Nolo's article on Credit Scoring. Even if you've paid your rent late -- no matter that it was for a justifiable reason -- this may count against you, as explained in Nolo's article Rent Payment History on Your Credit Report? What Tenants Need to Know.
Because your credit history has such an important effect on the type and amount of mortgage loan you'll be offered, check your credit report and clean up your file if necessary -- well before, not after, you apply for a mortgage.
Loan Preapproval vs. Loan Prequalification
Once you've done the basic calculations and completed a financial statement, you can ask a lender or loan broker for a prequalification letter saying that loan approval for a specified amount is likely based on your income and credit history. Prequalifying lets you determine exactly how much you'll be able to borrow and how much you'll need for a down payment and closing costs.
It's best to do more than prequalify for a loan: You should also try to be preapproved for a specific loan amount. This means a lender has already indicated a willingness to approve you loan based on having checked your credit and evaluated your financial situation, rather than simply relied on your own statements. Preapproval isn't an all-out guarantee that the lender would actually fund the loan, but it's as close as you're going to get to one, and your home seller will want to see it. The lender will make actual loan approval conditional on an appraisal of the property, a title report, and other conditions.
With all the choices out there, shopping for a mortgage can seem like an overwhelming task. There's good news, however: Despite the many choices of where to get loans (banks, credit unions, savings and loans, insurance companies, and mortgage bankers) their offerings are pretty well standardized, in order to comply with government rules. (The Federal National Mortgage Association or "Fannie Mae," as well as other quasi-governmental corporations, set these rules as a condition for buying loans off the lenders.) What's more, some of the creative mortgage variations that were available before the real estate bubble burst have gone the way of the dodo bird.
Start by deciding what type of mortgage you're interested in. The main choices are between a fixed rate and adjustable rate mortgage, though some hybrids of the two are still available. Once you've narrowed your sights -- for example, to a 30-year fixed term mortgage for $300,000 -- you'll be ready to compare apples to apples.
At that point, you can either start looking at mortgage rates yourself or go straight to a loan broker. Mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers and on mortgage websites. (See Nolo's article Where to Shop for a Mortgage.) Realize, however, that the published rates assume that you've got stellar credit and a good income -- anything less and you'll pay more to borrow money.
It's wise to do some advance research even if you decide to work with a loan broker, so that you'll have a sense of the market. Some loan brokers charge the consumer directly, others collect a fee from the lender (though this ultimately adds a little to what you pay for your mortgage).
Be sure to check out government-subsidized mortgages, which offer both no down payment and low down payment plans. (See the question What kinds of government loans are available to homebuyers?, below.) Also, ask banks and other private lenders about any first-time buyer programs that offer low down payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit.
Finally, don't forget private sources of mortgage money -- parents, other relatives, friends, or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all. And its popularity is increasing as credit tightens.
With many lenders selling your mortgage to a larger bank, they have to price that mortgage according to the guidelines of that bank. When you work with a portfolio lender you are working with the actual institution that is going to lend you the money and will be collecting your payment. Here are some examples of the benefits of portfolio lending:
- The rate for a given product is not infuenced by your home style or loan amount
* No price-ups for over 417k loan amounts
* No price-ups for lending on a condominium over 75% LTV (loan to value)
* No price-ups for 2 Family homes as your primary home
* No Charge to NOT escrow, in fact many Porfolio Lenders do not escrow tax and insurance
- No private mortgage insurance is charged for a Portfolio Mortgage
- The FICO credit score used to qualify is the HIGHER of either borrower
- You can speak directly with the underwriter and loan officer anytime you want, most are local
- Your mortgage will never be sold and you can even meet in person if you have a question
- No miminum equity in rental in order to use the rental income
- Very rarely do we require Tax returns for a W2 paid employee, EVEN if commision based
Actual Interest Rate - One of two interest rates associated with a loan. The Actual Interest Rate is the annual rate of interest you pay on your loan. It is also called the "note rate." It is the rate used to calculate your monthly payments.
Adjustable Rate Mortgage (ARM) - A mortgage loan or deed of trust which allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception of the loan.
Adjustment Interval - This is the time between changes in your interest rate and monthly payments on an Adjustable Rate Mortgage.
Affordability - An estimate of the amount you can afford to pay when you buy a home. A mortgage banker or realtor can provide this estimated figure to help you determine the likely range for which you could qualify to borrow from a lender.
Agency Disclosure - A real estate agency must declare where their interest lies. Most states require that an agent disclose who they represent in a real estate transaction. The "buyer's agent" is supporting the interests of the buyer and the "seller's agent" is supporting the interests of the seller in negotiating a sale.
Amortization - A calculation that shows the periodic payments of both principal and interest over the life of the loan from start to maturity. The amortization shows how the loan balance declines by the amount of the total scheduled payment, the amount of any extra payment, and how each payment is allocated between principal and interest. The scheduled payment less the interest equals amortization.
Amortization Schedule - A table showing the amounts of principal and interest due at regular intervals and the unpaid balance of the loan after each payment is made.
Amount Financed - This figure is used to calculate your Annual Percentage Rate. It represents your loan amount less any prepaid finance charges. It assumes you will keep the loan to maturity, and will make only the required monthly payments.
Annual Percentage Rate - One of two interest rates associated with a loan. The Annual Percentage Rate (APR) includes the interest and any additional costs or prepaid finance charges you might pay. Additional costs that are considered in the APR include prepaid interest, private mortgage insurance, closing fees, points, etc. The APR represents the total annual cost of credit with all charges included. It will usually be slightly higher than the Actual Interest Rate because it includes these additional costs, assuming you keep the loan to maturity.
Application Fee - A lender may charge a fee to cover the costs of initiating a loan application. Costs such as a property appraisal, credit report, or a rate-lock fee may also be included in the application fee. This fee is typically credited toward your closing costs.
Appraisal - A written analysis of the value of your home. An appraisal is performed and prepared by a licensed professional, using objective criteria, to set an estimated property value. The appraisal will determine an approximate fair market value based on recent sales of similar homes in your area. New mortgages and most refinancing packages require an appraisal as part of the loan process.
Appraisal Fee - The fee charged by a licensed, certified appraiser to prepare the written appraisal as described above. The appraisal fee will vary based on your geographic region and the type of property.
Arrearages - The amounts which are past due on a loan (usually past due payments), excluding any amounts which become due through acceleration.
Assessment - The value placed on property for the purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.
Assignment - The transfer of ownership, rights, or interests in a property by one person, called the "assignor," to another, called the "assignee."
Assignment of Mortgage - A document which transfers ownership of a mortgage from one mortgagee to another (as from the originator of the loan to the permanent investor).
Assumable Mortgage - A mortgage that lets you transfer your mortgage and its terms to the purchaser of your home. This can be an advantage if and when you sell.
Assumption - A method of selling real estate where the buyer of the property agrees to become responsible for the repayment of an existing loan on the property.
Backup offer - An alternate offer to buy a property that will be accepted if the first offer fails to close as planned.
Balloon mortgage - A short-term fixed-rate loan with fixed monthly payments for a set number of years followed by a single balloon payment for the entire amount of remaining principal at the end of the term. Typically, the balloon payment may be due at the end of five, seven, or ten years. Borrowers with balloon loans may have the right to refinance the loan when the balloon payment is due, but the right to refinance is not guaranteed.
Bankruptcy - A proceeding in a federal court to relieve certain debts of a person or a business unable to pay its debts. The person's assets are then turned over to a trustee and used to pay outstanding bills.
Base loan amount - The foundation amount used to calculate loan payments. If any other charges are to be included in the loan payment, those costs will be added to the base loan amount.
Bi-weekly Mortgage - A payment plan that allows the borrower to pay half their monthly payment every two weeks.
Blanket Mortgage - A lien on more than one parcel or unit of land, frequently incurred by subdividers or developers who have purchased a single tract of land for the purpose of dividing it into smaller parcels for sale or development. Also called a blanket trust deed.
Borrower - The person(s) who applies for and receives a loan and accepts the obligation to repay the loan in full according