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1. Exactly
what price house can I afford?
The easy answer to this all
important question of price is simply adding how
much you can afford to borrow to how much you have
available for your down payment. Remember to keep
enough cash or credit left over for move-in expenses
and an emergency reserve.
How much am I qualified to borrow?
Rule of Thumb:
The most frequently used rule is 28% and 36%
formulas. This test is for conventional mortgages.
For FHA, VA or other government sponsored loan
programs, the ratios applied are usually more
liberal.
The 28% Test:
The 28% test permits you to spend no more
than 28% of your gross monthly income on your total
monthly housing costs, including principal,
interest, taxes and insurance.
The 36% Test:
The 36% test permits you to spend no more
than 36% of your gross monthly income on all long
term debt, including your mortgage payment, credit
cards, student loans, car payments, etc. Any debt
that will not be paid off in 10 months or less is
considered long term debt.2. Why
is credit rating important?
Credit scoring (rating) is the
process where a lender determines how much of a risk
you present if the lender decides to loan you
money. Several factors are used to tabulate your
score, including:
- Promptness or lateness
of payments
- How much credit you
carry
- How many times credit reports
have been requested and various other factors.
Your
credit score is a rating of your credit worthiness.
To maximize your home buying power in the future,
you should be concerned about your credit score.
3. Can
I buy a house if I have filed bankruptcy?
Lenders are most concerned
about how your credit has been managed in the last
12 to 24 months. Lenders generally like you to wait
about two years after bankruptcy has been discharged
before applying for a loan. In this time period you
can rebuild your credit with a good payment history
and appropriate management of credit. With care,
there is no need for a past bankruptcy to stop you
from purchasing a new home.
4. How
are alimony and child support payments treated on my
loan application?
If
You Pay:
If you pay alimony it is considered a debt, just
like credit cards and other installment debt.
Child support payments are also considered a debt
and will be calculated in your debt-to-income
ratios. The only exception is if you are
entering your last year of alimony payments.
Lenders will not count monthly payments on loans
that have entered their last 10 months.
If You Receive:
If you receive alimony or child support,
these incomes can be used in the qualifying
process. You must have proof, however, you have
received these payments consistently for 12 to 24
months, depending on the underwriter. Your record
keeping must be meticulous. Photocopy each check or
obtain copies of canceled checks from the bank.
5. How
can I improve my credit?
This is a
task that takes time. Lenders look at your credit
history for the last several years and particularly
focus on the last 12 to 24 months for timely
payments and careful credit management. As you begin
the application process, total honesty is the best
policy. Be upfront about a bankruptcy. Tell your
lender if you have new judgments. It is better to
approach these issues from a problem solving
standpoint and work with your lender to determine
the best way to overcome it.
Often
times writing a letter to the lender explaining why
you had a period of late payments, judgments or
whatever else is on your credit report helps in
consideration for your loan. In addition, explain
how you have rectified your situation and what has
changed in your economic life to ensure it won’t
happen again. Many underwriters are understanding
and forgiving of periods of hardship in a Buyer’s
life, especially if it surrounds an isolated event.
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