Qualifying for a Low Down Payment Loan
To be considered for a low down payment loan, you generally need to have:
Sufficient income to support the monthly mortgage payment
Enough cash to cover the down payment Sufficient cash to cover normal closing costs
and related expenses
(explained below)
A good credit background that indicates your payment history or "willingness to
pay"
Sufficient appraisal value, which shows the house is at least equal to the purchase price
In some instances, a cash reserve equivalent to two monthly mortgage payments
Closing costs, or settlement costs, are paid when the home buyer and the seller meet to
exchange the necessary papers for the house to be legally transferred On the average,
closing costs run approximately 2% to 3% of the house price.
This percentage may vary, depending on where you live.
Closing costs include the loan origination fee (if not already paid), points, prepaid
homeowner's insurance, appraisal fee, lawyer's fee, recording fee, title search and
insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less
than 20% down) and other expenses. Your mortgage professional will give you a more exact
estimate of your closing costs.
Points are finance charges that are calculated at closing. Each point equals 1% of the
loan amount. For example, 2 points on a $100,000 loan equals $2,000. Companies may charge
1, 2 or 3 points in up-front costs in addition to the down payment. The more points you
pay, the lower your interest rate will be. In some cases, you may be able to finance the
points.
So How Much of a Mortgage Can You Afford?
There are two basic formulas commonly used to determine how much of a mortgage you can
reasonably afford. These formulas are called qualifying ratios
because they estimate the amount of money you should spend on mortgage payments in
relation to your income and other expenses.
It is important to remember that the following ratios may vary and each application is
handled on an individual basis, so the guidelines are just that -- guidelines. There are
many affordability programs, both government and conventional, that have more lenient
requirements for low and moderate income families.
Many of these programs involve financial counseling for low- and moderate-income people
interested in buying a home and in return, offer more lenient requirements.
Generally speaking, to qualify for conventional loans, housing expenses should not exceed
26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly
income. Monthly housing costs include the mortgage
principal, interest, taxes and insurance, often abbreviated PITI. For example, if your
annual income is $30,000, your gross monthly income is $2,500, times 28% = $700. So you
would probably qualify for a conventional home loan that requires monthly payments of
$700.
Any expenses that extend 11 months or more into the future are termed long-term debt, such
as a car loan. Total monthly costs, including PITI and all other long-term debt, should
equal no greater than 33% to 36% of your gross monthly income for conventional loans.
Using the same example, $2,500 x 36% = $900. So the total of your monthly housing expenses
plus any long-term debts each month cannot exceed $900. For FHA the ratio is 41%.
Maximum allowable monthly housing expense 26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA
Maximum allowable monthly housing expense and long-term debt 33% - 36% of gross monthly
income - Conventional
41% of gross monthly income - FHA
One way to determine how much to spend for housing is to compare your monthly income with
monthly long-term obligations and expenses. Use the worksheet, "Evaluating Your
Financial Resources," to determine how much
money you can spend on housing. Be sure to only include income you can definitely count
on.
When budgeting to buy a home, it is important to allow enough money for additional
expenses such as maintenance and insurance costs. If you are purchasing an existing home,
gather information such as utility cost averages and maintenance costs from previous
owners or tenants to help you better prepare for homeownership.
Homeowner's insurance or property insurance is another cost you will have to consider. The
lending institution holding the mortgage will require insurance in an amount sufficient to
cover the loan. However, to protect the full value of your
investment, you might want to consider purchasing insurance that provides the full
replacement cost if the home is destroyed. Some insurance only provides a fixed dollar
amount which may be insufficient to rebuild a badly damaged house. |
Down Payment
Low Down Payments
Down Payment Loans and Gifts
Qualifying For Low Down Payments
Down Payment Assistance
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