Pre-Qualifying

Consumer Information You Can Trust!

What Can You Afford?
Figuring out what you can afford to spend on a home calls for a healthy dose of realism, not wishful thinking. A little plain old arithmetic will give you some guidelines, before you start house shopping.

The 28/36 Guideline
One common guideline is that your mortgage payments should amount to no more than 28 percent of your monthly gross income (income before taxes, social security and other deductions). Your mortgage payment has four components: principal, interest, property taxes and insurance. In the lending business, these are commonly referred to as PITI.

For example:

Gross income / month $3,000 x 28% (or 0.28) = $840 available for PITI

Another method says that your mortgage payment plus your total long-term debt-load (such as car payments, college loans, installment payments) should not exceed 36 percent of your gross income.

For example:

Gross income / month $3,000 x 36% (or 0.36) = $1,080 for total debt load

Remember, the 28/36 formula is just a guideline. Lenders may use 25/33 instead-for instance, for an adjustable-rate mortgage with a down payment of less than 10 percent. Also, some special low-and moderate-income home buying programs use 33 percent and 38 percent as the qualifying numbers.

Up-front Costs
Buying a house means more than monthly payments. Up-front costs are sometimes paid in cash; they are not part of your mortgage amount. Major up-front costs include:

Down Payment: Traditionally, lenders required a 20 percent down payment for a 30-year fixed-rate mortgage. For a $90,000 house, that meant an $18,000 down payment (0.2 x 90,000). Today, home buyers can get mortgages with as little as 3 percent down (and even less in certain programs). A 3 percent down payment on a $90,000 house would be $2,700. In the first case, that leaves $72,000 for the amount of the mortgage, compared to $87,300 in the latter case.

If you pay less than 20 percent down, your lender might require that you get private mortgage insurance (PMI).

Closing Costs: Chief among these are points - various one-time fees that the lender charges. Each point is equal to 1 percent of the borrowed amount. On a $72,000 mortgage, for instance, that's $720 (0.01 x 72,000). All told, closing costs may run from 3 percent to 6 percent of the mortgage amount. Let's use a 5 percent figure for this example. For a $72,000 mortgage, that would be $3,600 (0.05 x 72,000).

Besides down payment and closing costs, there are other up-front costs in buying a home that add up--everything from mover's fees to telephone hookup charges. One way you can pare down your up-front costs is to pay less in points. Lenders will usually charge lower or even no points in exchange for a slightly higher interest rate on the mortgage. Our First Mortgage program features low closing cost and we don�t sell the servicing like most lenders!

The biggest hurdle for homebuyers, especially first-time buyers, is coming up with enough cash to cover the down payment and other up-front costs. A 20 percent down payment was long considered the traditional standard. But that's changed in today's highly competitive lending environment. Five and 10 percent down payments are now more common. Still, if your savings fall short, don't give up. Let's look at some ways to come up with the up-front money you need.

What Do You Have?
First, let's take a look at all the possible sources of down-payment funds available to you. Perhaps there are some you hadn't thought of immediately. For example, if you're a two-car family, could you get along with one car and sell the other? Could you get money from your parents or other family members? If so, you�ll need a letter stating that the money is a gift, not a loan.

Of course, you shouldn't pour all of that amount into a down payment. You�ll also need cash for closing costs, upcoming major home repairs and other things in your life. Be realistic about how much you can pay down.

Understanding The Credit Reporting System
Could your credit record contain information that would make a lender not approve a mortgage loan? The best way to know what your credit report shows is to order one and review it carefully. It�s a good idea to order your credit report once a year to make sure there are no errors on it.

You can order your credit report from any of the following credit reporting agencies, but most lenders in our area use Equifax:

Equifax or call 1-800-685-1111
Experian or call 1-888-397-3742
Trans Union or call 1-800-916-8800

We have a great booklet in ourConsumer Resource Center titled "Knowing and Understanding your Credit". To request a FREE copy to be mailed to you simply e-mail us and request the booklet. While you are waiting for your booklet check out this great site for information on the all important credit score: MyFICO

Qualifying For A Mortgage
Hopefully by now you have determined how much payment you can afford each month. Next you need to get some idea of what that translates into in a mortgage. The process of figuring out what size mortgage you qualify for before you actually apply for a loan is called pre-qualification. We can help you pre-qualify or you can do the calculations yourself using our calculators.