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When should you go for a mortgage? Check out yourself

Posted on: 02nd Apr, 2008 04:35 am
Getting a home loan/mortgage isn't always tough; what matters is how well you can manage it. There are people who have somehow qualified for a mortgage but sooner or later they have found themselves in a mess! So, first and foremost, you need to check your home loan affordability and then look out for programs on offer.

No doubt markets keep changing, but your personal finance and credit has a big role to play here. There are 3 things lenders will watch out for:
  • Your credit score
  • Your income and liabilities
  • Your down payment
But prior to approaching lenders, check out yourself 11 affordability factors which will help to decide whether it's time for you to take out a mortgage.

1. Are you debt-free?


Have you taken out credit cards, personal loans or an auto loan? If you have high interest credit cards, consider paying them down and avoid using more than 10% of your cards' limit at any given time. However, if you are debt-free, you can possibly go for a bigger mortgage depending upon other factors.

2. Do you save for retirement/children's education?


You may be saving for your retirement by investing into employer sponsored plans like 401k/403b as well as the IRAs. You may like to save for your child's education (Coverdell education Savings and 529 Plan) as well. So, decide whether you're comfortable with managing a mortgage as well as savings plan.

However, if you have too much of credit card debt, pay it off and then start saving for future. Otherwise, managing credit cards, savings and then a mortgage may be quite difficult!

3. How's your credit?


If you're looking for mortgage in a market where borrowing is costly and difficult, then having poor credit will cost you a lot. In such markets, a borrower with a score of 620 is no longer considered creditworthy! At least you should have a score of 680 to qualify for better rates and terms.

Although there are FHA and VA programs for those having poor credit, yet, if you want to get the best program and avoid mortgage problems in future, then wait till you repair your credit and then apply for a loan.

Often lenders take the initiative and work with borrowers in improving their credit scores prior to offering the loan. However, if your score is between 640 and 680, consider putting down 10-15% of purchase price so that some of the best programs are available to you.

As for the credit history, most lenders look for 3-5 tradelines (mortgage, second mortgage, credit cards, auto loan, student loan, store card, gas card, secured/unsecured installment loan etc) in good standing for the past 2 years.

4. Are there enough of cash reserves?


Most lenders will require you to have cash reserves/savings equal to at least 6 months of mortgage payments (PITI) apart from what you'll pay for closing costs and down payment.

However, not all programs (such as the FHA loans) require this but it's better to have some cash reserves so that in case there's an emergency you don't miss a payment and bring down your credit score.

5. Do you expect a raise in your income?


Are you new in the job market or have you been employed/self-employed for 2 years or so? Do you think your income will increase in a few months or so? Check out how much you can borrow at your current income. If you need more, wait till your income gets higher.

6. How much of your income goes into paying off debts?


In order to take on additional debt, you'd have to calculate how much of your income (include all sources of income) is being spent on current debts such as credit cards, personal loan, auto loan etc. This is given by the debt-to-income ratio or DTI.

The DTI = (total monthly debt payment/gross monthly income)
So, the % of income put into paying off debts = DTI * 100

Check out yourself the DTI using Debt-to-income Ratio calculator.

The higher the DTI, the lower are your chances of getting a mortgage because you pose a higher risk to lenders if you're already having a lot of debts to pay for.

7. Do you have an insurance policy?


Are you paying premiums for automobile, health or life insurance policies? Decide whether you can manage a mortgage while paying the premiums. Buying a home is no doubt an important step in your life but having a proper insurance coverage is also worth considering!

8. Are you investing in stocks?


You may like to invest in stocks, bonds, and mix and match options to build up a strong portfolio. However, investment options are subjected to market risks, so it's worth consulting an investment expert in order to get maximum returns. An estimate of such returns will help you decide whether it's worth investing or getting a mortgage.

9. What about home prices?


If it's a declining market with home prices going down, you may like to wait till prices get better. This is because lenders may reduce the loan amount as investors won't provide enough funds.

Moreover, if you cannot pay off the mortgage and decide to sell the home, you won't get enough proceeds because the home value will turn out to be lower than what you owe. Thus, in a declining market, you can't rely on home sales to pay down your mortgage. Rather you'd have to choose options which will have a negative impact on your credit.

However, if you're planning to occupy the house for a long time and your finances are in good shape, you may go for a home that's losing value now as you have the time to wait till prices get higher.


10. Concerned over inflation and Fed rate changes?


Rising inflation and changes in market rates may be some of your major concerns. The Fed often cuts down the rates thereby preventing the economy from recession. But lower rates often reduce the value of dollar thereby raising inflation. So, you need to think whether you can manage a mortgage besides maintaining your lifestyle in the midst of rising prices. If you compare inflation rate over the past few years, you'll get an idea of how much high or low prices will be in the next 5-10 years. This will help you decide whether you can afford to take out a home loan.


11. How does the industry affect you?


The lending industry has been changing with time to keep pace with inflation and economy. With market changes and scenarios like the credit crunch (due to sub-prime mortgage crisis in 2007), lenders have come up with stricter lending guidelines in order to reduce the rising rate of foreclosures.

Due to market changes, certain programs are simply not available. For example, due to the rising concern over foreclosures (in 2007-2008 beginning) and borrowers' inability to pay off loans, lenders have almost stopped offering 100% financing or 80/20 loans.

No doubt, inflation, home prices, fluctuating rates and industry changes have a big impact on your decision to take out a mortgage. But these are external factors on which you don't have much control. So, instead of taking decisions with respect to the external changes, it's better to improve factors that you can control - your personal finance, credit record, debt-to-income ratio and down payment.

If you still cannot decide whether to go for mortgage, Ask Me here.
Hi Jessica,

This is a good one and will really be helpful for the borrowers to decide whether they can afford a mortgage. It is very important decision to make in his life. Thousands of foreclosure is happening because they have not analyzed their situation properly whether they could afford it or not. Even at time they don't choose the right program and then suffer later.

And again they just want to short sale because the sale price of their neighboring just going down. But if you can afford to make the payments then why do you want to short sell? The market is down now but it will not remain the same. So the decision making in life is important whether you are taking a mortgage or going out of the mortgage.

Best of luck,
Larry
Posted on: 02nd Apr, 2008 10:42 pm
hi jessica ,

thanks for this useful information .i hope it will benefit all .atleast it has surely benefited me .thanks a lot .information was really useful.
Posted on: 03rd Apr, 2008 11:57 pm
Another awesome posts with great information. Thanks a million.
Posted on: 06th Apr, 2008 06:14 pm
I have a credit score 660 and enough saved for down payment. But now I'm thinking whether to pay my credit cards or put down the money I saved for down pmt. Also I have a collection on my credit report. So do you think taking a mtg will be good decision?
Posted on: 15th Apr, 2008 04:16 am
Welcome Nicks,

You should pay the credit card debt first as these are high interest rated. If take mortgage now then you may face problem as collections on your credit and these credit card debts. So if you don't pay the credit card debts then it may affect you credit negatively.

Let me know if you have any further quarries.
Posted on: 15th Apr, 2008 04:21 am
do i have to be 21 so that i can buy a home?
Posted on: 17th Apr, 2008 11:39 pm
Hi flora,

Welcome to the forum.

To get a mortgage one will have to rich to a certain age and this age limit varies from one state to another. Like in Alabama you will have to be at least 19 years of age but in Colorado you will have to be of 21 years of age.

Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 18th Apr, 2008 12:41 am
I agree with Niicss. It would be wise to get a handle on those cards first. When going for financing on your home, it would come out in your favor. Try to get that score up to at least 680-700 before applying. That's only 20 points for you. Believe me, just that little increase will make a world of difference.
Posted on: 18th Apr, 2008 05:49 pm
Hi ncoming,

Welcome to the forum.

Good suggestions :) you seems knowledgeable. Are you a lender?

BTW why don't you introduce yourself and let the community know about you at http://www.mortgagefit.com/introduce-yourself.html

Hope you will enjoy participating and helping people out in this community.

Best of luck,
Larry
Posted on: 19th Apr, 2008 12:06 am
Yes, welcome to the fourms, hope you find what you need here. goodluck.
Posted on: 19th Apr, 2008 05:57 pm
Thank you for the warm welcomes. Larry, no I'm not a lender though, I am a leader. I look forward to participating and sharing any knowledge I have that may help and assist the people of this community.

Best wishes,
Earlvin
Posted on: 21st Apr, 2008 05:27 pm
My fico score is 712 and I have 2% down payment saved. Should I pay down credit cards or save more money? does this help me qualify faster?
Posted on: 28th Apr, 2008 09:43 pm
Hi Tamaira,

Welcome to the forum.

Your credit score seems very good. But getting approved for mortgage depends on lots of things like your annual income, employment history, present DTI ratio should not be more than 36 percent. So can you please give us information regarding this?

You can also request for No-obligation free consultation to whether it is good choice for to go for the mortgage now.

Best of luck,
Larry
Posted on: 29th Apr, 2008 03:06 am
Tamaira,

Larry brought up some good points. You have a good FICO score, especially compared to a lot of people out there. You having a good FICO score, saving money and with the sense to plan and prepare tells me you at least have a good handle on managing your finances and that you have control over the credit cards not the credit cards controling you. Tell me if I'm wrong.

You should know there is a difference in paying down your credit cards versus paying them off. Merely paying them down will not put you in a better position to qualify for a new home, unless the balances are high which raise your DTI (Debt to Income Ratio). Another factor which raise your DTI is the number of creditors you have. To answer your question, if your DTI is high I would focus on "paying off" the credit cards before you go to qualify for a new home. As larry stated above there are various things that come into play. What's important is you want your money working for you and not the creditors. I could speak with you more and give you some private pointers if you like. Just send me a pm.

To your success!
Earlvin
Posted on: 29th Apr, 2008 10:55 am
Providing you are in a finatially viable situation of course would you say there was an apropriate age or life stage to begin considering a mortgage and also is there an upper bracket where you would consider it "too late" so to speak, to begin a mortgage? Many thanks xx
Posted on: 05th Jun, 2008 02:04 am
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