For generations investing in real estate, whether a home or commercial property has been a fairly safe investment. Most properties have held and even enjoyed small increases in value from one year to the next. An investment in real estate sometimes offered big financial returns, sometime small but usually always “safe” returns compared to other investments.
After the financial crisis of 2008, the world of real estate and mortgage lending has changed for the near future. Some property values have decreased up to double digits. Increased unemployment has spurred record numbers of foreclosures.
There are still many people looking to buy new homes though. Whether downsizing, upgrading, relocating for jobs or just hoping to take advantage of lower interest rates, there are many people wondering, “What kind of mortgage loan debt would I qualify for?”
Some potential homebuyers have their sights set on a home before they’ve been through a loan qualification process and this can sometimes lead to less than ideal financial decisions.
It’s fun to ride around and look, research and dream but it is important to take a look at what kind of mortgage you can pre-qualify for and even then to determine is that’s really a number that you can live with comfortably.
How Lenders Determine Mortgage Loan Affordability:
Well there is the standard that has been used by most lenders for years which is called the 28/36 rule. This is still a very helpful tool as long as applicants keep in mind that under this new real estate and banking culture, things have changed a bit. Lenders may tweak these numbers a few points for added security. They may also ask to see a portfolio for collateral and many are requiring more money down. Of course all of this usually stands on an applicant having an average or above credit rating.
What is the 28/36 rule?
Mortgage payments as well as property taxes and insurance shouldn’t total more than 28% of your gross pay. Yes, that’s gross pay, as opposed to net pay. That’s the first number.
Monthly outflow including mortgage payments, property taxes, insurance and installment debt such as credit cards, student loans, personal loans or car loans the cannot equal more that 36% of your gross pay. That’s the second number.
Here’s an example for a household with an income of $84,000.
If a household making $84,000 a year also had $500.00 worth of monthly installment payments, they could qualify for a mortgage of around $1,960.00 bases on the 28/36 rule.
Is the maximum mortgage loan best for you?
Most applicants are ecstatic to find that they qualify for the loan amount desired but before you sign on the dotted line, ask yourself a few important questions.
If I take on this mortgage loan will I still have money left over for…
– Paying off other debts?
– Saving for retirement?
– Saving for college tuition?
– Travel or vacations?
Remember, a higher mortgage payment also means:
– Higher taxes
– Higher monthly maintenance
– High homeowner’s insurance
It’s important to understand how a mortgage debt loan number is estimated but even if you qualify, you may not want to take advantage of the maximum amount of debt that you qualify for. Leaving some room for emergencies as well as pleasures can help you enjoy any home more.
Jonathan Kraft is a recognized expert in helping people to understand their consumer rights and protections. Learn more about consumer protection and the secrets used by identity thieves at the Identity Theft Secrets blog.
Mortgage Loan FAQ:
Question: Why would the mortgage loan officer want my landlord’s contact information? What questions will he ask?
I am planning to break my current lease to buy the house.
Answer: They will fax/mail a verification to your landlord that will ask if you paid on time, how much the payments are, if you have had NSF’s, have damages, etc.
As far as breaking your lease, it all depends on your lease. You could tell your mortgage officer that you are going to sublet the apartment (but don’t tell apartment manager that unless you are allowed to sublease it). Some mortgage brokers don’t care if you are breaking your lease, and some will assume that you are going to have to pay rent on apartment plus a mortgage payment, which will work against you in the loan process. Read your lease to see if there is a cancellation clause or a sublet clause.
Question: Can a 5% down conventional loan go through in today’s mortgage market?
I have been told by BBVA-Compass Bank as well as by a mortgage broker that I will be fine with just putting 5% down on a new house. But, I just got off the phone with a mortgage broker who says with Fannie Mae and Freddie Mac, 10% down is the minimum amount you can put down on a new house. By the way this is a conventional loan that is more expensive than an FHA type loan.
Answer: You can still get 95% financing on a home purchase, as long as you and the home you are purchasing meets Mortgage Insurance guidelines. Those guidelines are fairly strict these days. I would suggest you sit down with a lender and go through your options.
Question: Is a loan used to build your own home considered a mortgage?
And, assuming fair to good credit, how easy or hard is it to secure such a loan?
Answer: If your loan is taken out specifically for construction of the home it is then a construction loan. At the end of construction and when you become the occupant you will have to convert to a mortgage.
Now, if you take a personal loan out to acquire financing for the building of a home, that remains a personal loan. And will continue as a personal loan. This is also true if you draw on a line of credit to finance the construction or for any other purpose. It is still not a mortgage.
In short, a mortgage will be so noted in the loan.
Question: I haven’t missed a home mortgage payment since originating the loan. Need about 3 or 4 months relief?
Since my income has been affected by the economy, I have run out of money. Historically have made very good income and have never gone this long (1 year) without making deals. Do you think the lender will work with me?
Answer: Tough spot to be in, hope it works out for you. I think your best bet is the lender. It will be difficult to re-fi with another bank given your current financial situation, but you have a track record with your current lender. They may be open to a re-write of the terms of the original note. My buddy sat down with his bank, told them he needed time or he’d hand over the keys. Couple days later he was offered a lowered rate re-write with skipped payments added onto the end of the note.
Question: How long did it take you to close on your USDA Mortgage Loan?
I am getting a USDA mortgage loan and it is taking FOREVER to close. The underwriting is in its 6th week. I assume once the underwriting has been done, it will just be appraisal and setting us escrow because the attorney is pretty much ready to close once they receive the paperwork and I have insurance already set up. I do not understand why it is taking so long!!! Survey is already done as well.
Answer: If the appraisal has not been done and submitted to underwriting, you will be waiting and waiting and waiting. The underwriter MUST have the appraisal in hand in order to give approval. I can’t see how this went so wrong. Check with your Loan Officer. It is Mortgage 101.
Question: What kind of “income” is the right kind for mortgage lenders?
When it comes to calculating my income for purposes of qualifying for a mortgage loan:
Q1) What sort of job do I need 2 years history in and what sort of job don’t I need 2 years history in?
Q2) What sort of investments DO count toward my income?
Q3) What about self employed? If I ran my own business does it also need a 2 year track record?
Answer: 1) You need a permanent income which involves a paycheck which could be verified from your employer or bank.
2) Pension Funds, investments in bonds, stocks, cash in bank, real estate all count towards potential income or net worth.
3) You need a 2 year track record even if you are self-employed.
Question: What is a “Program 69″ Mortgage? Or loan program 69?
I was led to believe that it was a better choice than a reverse mortgage.
Answer: It is but you need to be 69 years old to apply. Where a reverse mortgage you have to lived in your house for a certain amount time and pay back the loan before you move out, and own the home.
Question: I am trying to get pre-qualified for a mortgage loan and the loan officer has not called or emailed!?
I’m not sure if I should go somewhere else or keep on her. It’s been a week now. I know that every time your credit is pulled, it goes down, which is why I really don’t want to go somewhere else to get approved. What should I do?
Answer: Call her! If she told you Monday & hasn’t called it is not going to hurt to call her! She may be really busy, but she should have at least called & told you that! If you need to go elsewhere, you have plenty of time.
I also wanted to let you know that your credit will not go down every time your report is pulled when dealing with a big purchase (i.e. a home or car). You can have your credit pulled as many times as you want within a 30-day period for that purchase with it only counting once. So, feel free to shop around with lenders to get the best interest rate!