Financing Tips

Most financial institutions base lending on the three C’s

• Credit – good credit – paying your bills on time – your credit score is important
• Capital – have the cash for a down payment and closing costs
• Capacity – have the earning capacity to handle the monthly payment along with your other obligations

Know how much you can afford

• Most financial institutions use a ratio of 28% of gross monthly income for your housing cost
• Housing cost includes the monthly amount to amortize the amount you finance plus real estate taxes, fire insurance and in some cases private mortgage insurance
• Private mortgage insurance is normally used when a borrower has less than a 20% down payment
• Another ratio is for total debts which is a range of 36%-38% of your gross monthly income
• Total debts would include monthly housing cost plus other items such as car payments, long term school loans, credit card balances that are not paid off monthly and any other fixed monthly payment
• Normally any installment type debts that are paid off within 10 months are not included

Examples of what you can afford – Assume $60,000 annual household income

• Your monthly gross income is $5,000
• 28% of this amount is $1,400
• 38% of this amount is $1,900
• Lets say you have $900 in other fixed monthly obligations then you only have $1,000 available for monthly housing cost
• In some situations if you have excellent credit these limits can be higher
• Whatever the numbers are you must feel comfortable with your monthly housing cost

How much can I finance?

• Programs are available today which allow you to finance 100% of the sale price
• Financial institutions finance on the sales price or appraised value of the home, whichever is less
• The less you put down the higher the monthly cost – this is where private mortgage insurance is applied
• If you finance 90% the monthly cost is less than if you financed 100%

What kind of information should be available when I apply for a home mortgage

• The attached list will give you a guide
• The important things are:
• One month of pay stubs showing YTD earnings.
• Last 2 years W2’s
• At least 2 recent bank statements to evidence cash on hand for closing
• Know who you owe and the monthly payments
• Agreement of Sale for the property you are buying

Let's calculate a monthly payment – two examples using no money down vs. a 10% down payment

• The sale price of the home is $150,000 – annual real estate taxes of $2,500 and the annual fire insurance premium is $500

Payment calculator you can use to determine the principal & interest portion of your monthly payment – the figures given are per $1000 financed

• 6%: $6.00
• 6.25%: $6.16
• 6.5%: $6.32
• 6.75%: $6.49
• 7%: $6.65