The Lawhead Team would like to share some helpful information to help home buyers figure out how much they can afford for a down payment and monthly payments as well as some of the other costs which are incurred when purchasing a home.

To buy a home, you need both a down payment and a monthly payment.  It is important to find out the most you can afford for a monthly payment first before you start looking at homes so you don’t waste your time looking at homes you can not afford.  You also don’t want to pass up homes you thought you couldn’t afford but which actually might be within your reach.  In order to figure out your monthly payment, a good rule of thumb is to figure it will be between 0.75% to 1.15% of the purchase price.

Here is a quick rule of thumb: Most people can afford a home which costs up to three times their annual household income.  If you have little or no debt and can put 20% down, you can probably buy a house worth close to four times your annual income. For example, if you and your spouse make $60,000 a year you can probably buy a $180,000 home if you have moderate debt (debt payments of less than 12% of your income) and a $240,000 home if you have little or no debt and can make a 20% down payment.

If you are single and make $35,000 a year, you can probably afford a home that is about $105,000 and in most parts of the country you can’t buy a home that cheap.  Being married allows a couple to combine their incomes to better afford a home.

First things first, you need to have saved enough money for a down payment.  Most down payments are 20% of the price of the home, however you can also qualify for loans like FHA loans where you only have to put 3% down. If you can put 20% or more down, you are almost certain to qualify for some kind of loan.  The bank will be willing to loan more money than otherwise and you wont have to pay for Private Mortgage Insurance.

If you buy a duplex or a home with a garage apartment this increases your buying power.  When purchasing a home with a rental unit attached to it, you can count the rent you’ll receive as income.  This will allow you to buy a substantially more expensive home than otherwise.  Once you subtract the rent you will receive, you will end up having a cheaper monthly payment.

When looking at a 30 year loan vs. a 15 year loan, it is important to consider what you can afford a month and base that on the time frame of the loan.  The advantage of a 30 year loan is that the monthly payments are lower and you can qualify for a much larger loan and buy a much larger or nicer home.  The downside is that you have to make payments for double the time than a 15 year loan.  You will also pay a lot more interest over time with a 30 year loan however in most cases it is still best to go with a 30 year loan than a 15 year loan.

On top of the down payment and monthly payments, you will also have to pay the closing costs.  You can either pay the closing costs from your savings (which lessens the amount you have for your down payment) or you can have the closing costs added to the loan (which is called “rolling the closing costs” into the mortgage).

Should you have any questions about what to be ready to pay for when you start looking for your new home, The Lawhead Team is always available to answer any questions you may have.

There are four individual qualification criteria for your mortgage rates – down payment, debt ratio, credit scores, and interest points.  Keep in mind, some of these factors can offset others.  For example, if you have excellent credit and a large down payment you may be offered the lenders best rate, even if your debt ratios are less than ideal.

Down Payment — Mortgage lenders price their loans largely based on the amount of risk they face. Your down payment is meant to offset some of that risk. By putting more money down, you are also reducing the lender’s investment and risk. This can help you obtain a more favorable interest rate. It seems many lenders offer their lowest mortgage rates to borrowers who put at least 25% down. Keep in mind this is for getting the best rate, not for getting approved. It’s a key distinction. Borrowers can get approved for a loan with a down payment as low as 3.5% (for FHA mortgages) or even 0% (for VA and USDA loans).

Debt Ratio — Lenders will also want to know how much of your gross monthly income you are paying toward your debts. This is referred to as your debt-to-income ratio, or DTI. You have two ratios. Your front-end ratio only includes your housing-related debt. Your back-end ratio considers all of your other debts as well, in addition to your mortgage debt. Borrowers can get approved for a home loan with a back-end DTI ratio of 45%, and sometimes higher. But if you want to qualify for the lowest mortgage rates available, you’ll need a combined debt ratio no higher than 30% (based on what lenders told us). Again, there are exceptions to every rule.

Credit Scores — Your credit score is computed based on the information found within your credit reports. There are several scoring models in use today. The FICO score is the one most commonly used by mortgage lenders. It’s a three-digit number between 300 and 850, and it’s meant to show the lender how much risk you bring the table. Most of the lenders we heard from said they reserve their best mortgage rates for borrowers with FICO scores of 740 or higher. A few set the bar even higher, at 760+. You can obtain your reports for free through AnnualCreditReport.com, and you can get your FICO scores for a small fee through MyFICO.com.

Interest Points — When you take out a loan to buy a house, you will have the option to pay “points” at closing to reduce your interest rate. These discounts points are a form of prepaid interest. One point equals one percent of the loan amount. It’s a trade-off that can work in your favor, if you keep the loan long enough. You pay more up front to secure the lowest possible mortgage rate, thereby reducing the size of your monthly payments. Each point you pay could shave down your interest rate by one-eighth to one-quarter of a percentage point. Most of the lenders we queried reserve their best rates for borrowers who pay at least one point at closing.

Of course there are always other many other variables on top of other variables that can change around your chances of getting the lowest mortgage rates a lender can offer.  This list above at least gives you a general idea of a well qualified borrower for 2012.