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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.
I don't think there is an age limit on a mortgage, LOL, some people who are older have a better financial situation and better credit rating and would probably get a better rate than someone who is younger.
Posted on: 07th Jun, 2008 02:44 pm
I don't think there is an age limit on a mortgage either, however I do think the ability to pay the mortgage is inspected. Although they may have the best credit in the world and have the opportunity to get the better rate, the ability to pay will ultimately win out over these other two.

I don't think they would address it as an age thing, but the income would be looked at with a fine tooth comb.
Posted on: 07th Jun, 2008 08:36 pm
I agree with what you are saying, I am sure they would recommend some type of insurance on the loan itself to guarentee pay off if the inevitable should happen, I am thinking that these rates can not be cheap either.
Posted on: 10th Jun, 2008 03:46 pm
True, they probably will make them get insurance that will secure the funds if something did happen. That is just smart business on their part but it is also something that the borrower should want anyway to protect their loved ones that they leave behind. Should have insurance on any loan that you have in place anyway for your own protection.
Posted on: 10th Jun, 2008 07:07 pm
great advice, ncoming.
Posted on: 15th Jun, 2008 10:30 am
You can either talk to your mortgage company or the same company that carries you other insurances to see what is out there. It should not be hard to find the informaiton on the insurances that you need to cover your loan if something bad should happen unexpectedly.
Posted on: 16th Jun, 2008 08:28 am
True, my mortgage carrier has companies available that will offer the insurances needed.
Posted on: 19th Jun, 2008 03:36 am
most do have carriers on their coat tails, so you should be able to call on your mortgage company to find someone that suits yours and their needs.
Posted on: 21st Jun, 2008 02:00 pm
Yes, we know several people who carry "mortgage protection insurance" which takes care of you mortgage if anything happens to you.
Posted on: 21st Jun, 2008 05:56 pm
i'm not a fan of mortgage life insurance policies. first and foremost, they are usually used as a tool by mortgage lenders to beef up their profits. most people don't die immediately after taking their insurance, so payout on claims is minimized.

furthermore, such policies are set up to pay only the balance owed. here's an example: let's say you borrow $200,000 and purchase mortgage life insurance for the same amount. obviously the premium paid is based on the amount borrowed. several years later, with the balance at a lesser amount (let's say it's $150,000), you (the borrower) die. what will happen is that the mortgage gets paid in full, @ $150,000. what happens to the other $50,000? nothing - it's not part of the coverage.

a much better idea for someone who wants to protect his or her family is a regular life insurance policy. again, let's use the $200,000 loan as a guide. if you then go out and purchase a $200,000 life policy and die with a balance of $150,000 remaining, your heirs have options.

they can use the proceeds of the policy to pay off the mortgage and still have $50,000 to use...they can not use any of the proceeds to pay the mortgage, but continue making payments and use the entire $200,000 for other purposes.

remember, life insurance is not for the dying, but for the living. when we purchase life insurance, we are trying to set up our heirs for the future. if that means we enable them to have cash for immediate needs as well as (perhaps) partial payment of the mortgage debt, then that's what was needed.

mortgage life insurance is not worth the bother. another reason - if, in the above scenario, the borrower died with a remaining balance of $10,000 - that's what gets paid off and that other $190,000 just drifts away. what a deal for the insurance company!
Posted on: 22nd Sep, 2008 07:57 am
I would like to purchase a villa in florida, on a long term lease for people visiting the attractions. My property in the uk is valued at £260,000 which I owe £37,000. To afford the down payment required I would have to borrow against my home, unfortunately as we are in our 50's we can only borrow over 19yrs; costing too much. Is it possible to move my mortgage to an American bank or institution and borrow the deposit over a longer period, against this property in the UK. Sory It's long winded!
Posted on: 13th Oct, 2008 01:01 pm
Hi garry!

I do not think you can move your mortgage to an American bank. You can consult your UK lender and check with him.

Posted on: 15th Oct, 2008 04:06 am
my cedit history is only 1 years old but my credit score is 712 can i get mortgage i have 20 % down payment and job?
Posted on: 31st Dec, 2008 08:33 pm
As far as I know, lenders consider 2 years of credit history. However as you have a good credit score and willing to pay 20% down, then I think you will be able to get a loan. But remember the lender will check your income history thoroughly.
Posted on: 01st Jan, 2009 12:32 am
go for it, khan. your history ought to be sufficient to satisfy most lenders, and you can always supplement what they feel is lacking with alternative sources of credit (utility bills, rental payments, etc.).
Posted on: 17th Jan, 2009 05:56 am
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