Buying Your Home

The first step in finding a home is figuring out how much you can afford to spend. This probably means you're going to need to borrow money, and that is what getting a mortgage is all about.

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Qualifying for a loan is the heart of the mortgage process, this is where the lender decides how much loan you're capable of repaying.

Taking out a mortgage is probably the biggest obstacle facing prospective homeowners. The bank may not want to lend you as much as you need. This is a big problem for you, but there's a reason for it. Put yourself in the bank's shoes: If you were going to lend people money, what would you want to know about them? Basically, you'd like to know 1) if they make enough money to pay you back, 2) if they've been trustworthy in the past, and 3) if they have something of value should they be unable to pay you back.

In financial vernacular, you've just been introduced to the concepts of income, credit worthiness, and collateral. Let's look at each one.

Do You Make Enough to Pay the Lender Back?
Your lender will want to know not only how much money you have, but how much you will likely make over the next 30 years. Also, what are your other debts? Do you owe money for college or on credit cards? Do you have any other assets? Things like stocks and mutual funds or real property like a boat or a car are also considered in figuring out how much a bank will lend you.

In general, the lender will want you to come up with at least 20% of the value of your new home for a down payment before they will give you a mortgage. However, there are special financing arrangements that will get you into a new home for as little as 3.5% of the asking price.

The lender will also plug your income numbers into a couple of formulas: the front-end ratio (having to do with your mortgage payments) and the back-end ratio (having to do with your debt).

Let's say your gross income is $4,000 a month, and you have $1,000 a month in debt payments. The rule of thumb is that they'll allow you to pay 29% of your gross income toward your mortgage payment every month. This is known as the front-end ratio. In this example, 29% of $4,000 is just under $1,200 a month -- so, they'll reason, you can put $1,200 toward your mortgage payment.

Your debt ratio or back-end ratio, on the other hand, is 1,000/4,000, or 25%. That's not bad. They don't want more than 41% going to your other debt. (These ratios can vary somewhat; the ones given here are good examples).

Have You Been Trustworthy in the Past?
What is your credit rating? The three major credit reporting agencies are Experian (formerly TRW), Equifax, and Trans Union. For about $8 each (less in some states) you can order reports directly from their websites. These reports will indicate whether you have a couple years' history of paying your bills on time.

If not, there are ways to clean up your credit record that will make you more attractive to lenders.

Do You Have Something to Use as Collateral?
In case you can't repay the loan, the bank can foreclose on the mortgage and repossess the house. That means they own it, and you no longer do. Your house now belongs to the bank, and it is unlikely that anyone will ever loan you money again. Obviously you will want to avoid this scenario at all costs.

The above three considerations are from the bank's point of view. Now, let's take a look at a few things from your point of view.

Your Timeline
In determining whether you should buy a new home, think about how long you're planning to stay in it. It generally doesn't make economic sense to buy if you are planning to stay there for less than four years. Why? Because you're going to be paying fees to buy and then to sell your house. It would have to appreciate in value very quickly between the buying and the selling to make it financially worthwhile.

Your Comfort Zone
Before you borrow $90,000 or $200,000 or whatever the amount is, figure out whether you can really afford it. Just because the bank will loan it to you doesn't mean that you will live your life in such a way as to be able to pay it back. Are you planning on having a big family? Would you rather replace your Cavalier with a new Mercedes? Your house payment is just one piece of your financial puzzle. What might you need to give up to make that house a reality?

LOCKING IN THE INTEREST RATE
Worried that interest rates may spike before you close? When you're looking for a mortgage, you're likely to shop among lenders for the most favorable interest rate, and the lowest points and other up-front charges. When you find the most favorable terms and the lender that you want, you'll apply to that lender. Lock-ins are an way to ensure that at settlement, what you requested from your lender is what you'll get.

What is a Lock-In?
A lock-in, also called a rate-lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed.

Depending upon the lender, you may be able to lock in your interest rate and points when:

• You file your application;
•  During processing of the loan;
•  When the loan is approved; or
•  Later

Pro
Lock-Ins protect you against increases while your application is processed.

Con
A locked-in rate may prevent you from taking advantage of price decreases during this period.

CLOSING YOUR LOAN
Make sure the closing is scheduled before your loan commitment, and any rate lock-in, will expire. But be sure there is enough time to finish any loan documentation and be prepared at closing to do two things:

Sign Legal Documents
These documents fall into two categories: The agreement between you and the lender regarding the terms and conditions of the mortgage and the agreement between you and the builder to transfer ownership of the property.

Pay Closing Costs and Escrow Items
There are numerous fees associated with obtaining a mortgage and transferring property ownership. You will be expected to pay these fees at closing. The builder depending on the terms and conditions of your loan can pay some of these fees. You also will need to show your homeowner's insurance policy, and any other requirements such as flood insurance, plus proof of payment.