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Our loan actually closed much earlier than we first anticipated and we were thrilled how smoothly the entire process was. |
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—Pat & Don Eugene, OR.
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For most people, buying is more expensive than renting.
However, the tax deductibility of your mortgage expense makes owning a home a bit more practical. Uncle Sam helps make about a third of your mortgage payment through tax deductibility.
Once you have made the leap and decided that you are going to buy a home, it's time to find out what you can afford. This is where we can help you.
When you decide to buy you should discuss it with one of our a qualified loan agents . Unless you fit into one of the "special categories" of loans—VA, or First Time homebuyer—you are going to get a "conventional loan." The remainder of this discussion pertains to "conventional loans."
The purchase price that you will be able to afford depends on 3 main factors:
- Your income and how much other debt you have. This will determine how large a payment you can afford.
- How much you have for a down payment and for closing costs.
- Your credit history.
Loan Jargon
The following three terms will help you better understand the rest of this scenario:
- Loan-to-Value (or LTV)
This is the loan amount as a percentage of the purchase price or appraised value (whichever is less). If you are buying a $150,000 home with $15,000 down payment you have a 90% LTV. Loans over 80% LTV require either PMI (Private Mortgage Insurance) or a combination of a 1st and 2nd mortgage which avoids the PMI.
- Housing Ratio
This is your total monthly housing expense (principal, interest, tax, insurance, and PMI and homeowners dues (condos if applicable) divided by your gross monthly income. Note "gross" income is "before" deductions. If you have a "W2" job your income is easy to determine. If you are self employed, please note your gross income is what you bring from your Schedule C onto line 12 of your 1040. Also, a 2 year history of consistent self-employment income is generally necessary.
- Debt Ratio
This is your total monthly housing expense plus your monthly payments of your installment and revolving debt. Some details here: this would include child support, alimony or separation maintenance. Any debt with fewer than 10 months to go does not count. A debt such as a "buy furniture now, make no payments until more than a year from now" does not count as long as there are 12 months to go without payments. The same applies for student loans.
Your income and credit will determine the sizeof the loan you can qualify for. You will need cash for 3 things:
- The "Down Payment"
- Closing Costs
This is where many people get off track. You need to cover your one time or "non-recurring" closing costs, your "recurring" closing costs: prepaid interest, insurance, impounds if there is PMI and potential prorated property tax.
- Reserves
You need more than $10.00 left in the bank after you purchase. We need to see 2 months (PITI) of your total monthly housing expenses in reserve. You will want to be sure that you get together all of the cash necessary to close.
Once we have determined what size loan you will be able to qualify for and where the money is coming from we can determine how expensive a home you can afford.
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