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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 Heather,

If you wish to settle your debts, go for it only if the collection agency agrees to update your account status as "Paid in full" or they agree to remove the listing once you've paid the settled amount. I'm saying this because settling debts and cutting it into half will affect your credit score and bring it down by several points, unless your credit report is updated as "Paid in full" or the collection agency removes the listing after the settlement. And then you'll have to wait for some more time to actually get back on track and qualify for an FHA loan.

Since your scores are already too low, I would suggest that you don't settle up to half of the debt. What I would suggest is to negotiate with the collection agency and request an alternative payment plan. This would need you to make monthly payments including the interest as well, but slowly and gradually it will have a positive impact on your credit. And when you intend to take out a long term loan like a mortgage, I believe you should have a clean credit record. So, wait for some time, improve your score and then try getting a mortgage.
Posted on: 18th Jun, 2010 06:12 am
I am in partial agreement with what Jessica said. Settling a collection may not have the favorable impact you'd like, unless, as noted, they mark your account as "paid in full" rather than "settled."

The aspect of her commentary that I don't quite agree with concerns the payment plan. That, of course, will take you far beyond your mid-2011 target date, I would have to think. Not only that, but a payment plan with a collection agent won't allow you to obtain a mortgage - you must have a substantial payment record on such a thing, which a year from now won't exist. Creditors want collections paid in full, almost exclusively. Partial payments or payment plans won't be of much assistance when you seek a mortgage.
Posted on: 19th Jun, 2010 08:13 am
how old is to old to get a mortgage if you are ovetr the age of 50
Posted on: 27th Jul, 2010 05:42 am
Hi june,

As far as I know, age is not a big factor when you're trying to obtain a mortgage. You can get a mortgage even at the age of 50 if you've a stable financial situation and the required credit score. However, if you want to get a reverse mortgage on your property, then you should be of 62 years of age at least.
Posted on: 27th Jul, 2010 11:40 pm
Great post, Thank you for giving huge information about When should you go for a mortgage? Check out yourself . It gives useful information, keep posting.
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Mortgage Repossessions
Posted on: 09th Aug, 2010 01:59 am
I was wanting to look into buying a home because we are paying so much in rent that people keep telling me we could be buying and pay less. And I had really good credit until my husband lost his job now my credit is low because of me being the only one working in the home. What would you suggest I do in my situation??? We really need to move which is what we were saving for before he lost his job now we are stuck in a 2 br home with 5 of us... any suggestions would be great!!
Posted on: 29th Aug, 2010 06:02 pm
Posted on: 30th Aug, 2010 01:51 am
I curently own a townhouse but would like to get a second home as it looks like a buyers market at this time, I plan to rent my townhouse until the market gets better to sell it, I , however am told that I cannot qualify for the 2nd mortgage as my DTI is too high. I have excellent credit score in the 800 and the only the debt I have is my current mortgage, when I use my credit cards they are paid in full when the bill comes and have recently paid off my car loan early, what can I do to qualify for a mortgage of about 100,000.00 ?
Posted on: 31st Aug, 2010 09:12 pm
hi ladyb,

unless you lower your dti or increase your income, you won't be able to qualify for a second mortgage. you've mentioned that you've paid off the car loan recently. this might have reduced your dti to some extent. you can contact the lenders now and apply for a loan to check out whether or not you would qualify for it.
Posted on: 01st Sep, 2010 01:42 am
Ladyb, unless you have substantial equity in your current home, lenders are not willing to consider rental income in calcuation of your qualifying. That's just the way things have changed throughout the years, particularly as a result of the mortgage "crisis" we've experienced in these last few years. Obviously, a boost in income would do you a world of good, but that's not usually something that's easy to attain. If you attempt to purchase this new property using an FHA loan, though, you could seek out a cosigner (family member) who'd help you qualify, perhaps.
Posted on: 01st Sep, 2010 09:29 am
Firstly the original article was very good Reading. Secondly I would like to know if what I was told today buy a realtor is true. He was showing a 569k house and he said first time home buyers could get a 500k morgage with only about 10k for a deposit . If this is possible under what circumstances would
one be able to do this? This was in southern California if that makes a differance.
Thanks.
Posted on: 16th Oct, 2010 10:12 pm
Hi Han!

Welcome to forums!

In order to get a normal conventional mortgage, you will have to give a down payment of 20%. However, as you're based in California, you will be able to go for CalFHA first time home owners program. In that case, you can give a lower amount of down payment. You can check out the given page for the same:
"http://www.calhfa.ca.gov/homeownership/programs/"

Feel free to ask if you've further queries.

Sussane
Posted on: 17th Jan, 2011 09:03 pm
Hi Jessica,

I fully understand what are you trying to emphasize in sharing this thought of yours. I am so fascinated with the way you discuss and explained each topic so well in a simple and concise manner.

It will really help many persons to fully understand what should it takes to qualify for a mortgage.
Posted on: 17th Jan, 2011 11:25 pm
My wife and i are soon wanting to buy in San Francisco. We have credit scores over 700, $155,000 income, 10% down payment and 3-6 months in reserves. I work for the goverment in law enforcement(7years),but my wife only has 7 months with her employer after a year and a half of being unemployed due to the economy. What are our chances of qualifying for a conventional home loan.
Posted on: 18th Nov, 2011 12:52 pm
Hi Terry,

You will be able to qualify for a mortgage easily. However, it might be a little difficult for your wife to qualify for a mortgage as she does not have 2 years of employment history. In such a situation, it will be better if you can get the mortgage solely in your name for the time being. Then later on, you can refinance it and include your wife in it.

Thanks
Posted on: 18th Nov, 2011 07:31 pm
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