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Mortgages

I. Does the mortgage fit your budget
II. What is a Mortgage?
III. How much will it cost?
IV. Pre-Qualification to Closing

Introduction

Making the decision to buy a home after years of renting is a difficult one. Millions of Americans have decided over the years that the cost benefits of buying outweigh the risks. What are some of the cost benefits? Eventually, after years of PITI payments, you will own your home. For over 50% of Americans their home is their primary source of wealth. Each mortgage payment would be an investment in your future. Renting, in sharp contrast, offers no benefits down the road, since each rental payment goes to the property owner and provides no future benefit to you or your family. If renting seems to make less sense to you, perhaps now is the time to try and figure out if you can afford to buy.

Does the mortgage fit your budget

How much you can actually afford may depend upon whether you are shopping for a conventional or a federal mortgage. A federal mortgage is one backed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). A conventional mortgage is backed by a private institution, like a commercial bank, mutual savings bank, or mortgage company.

For a federal mortgage, the Department of Housing and Urban Development (HUD) says a lender, typically, is looking for your monthly mortgage payment, which is often called your housing expense, to be no more than 29% of your monthly income before taxes. Your overall debt cost (mortgage payment plus all other monthly expenses), which is usually referred to as debt-to-income ratio, should be 41% of your monthly income before taxes.

For a conventional mortgage the suggested monthly mortgage payment (housing expense) should fall somewhere between 26% and 28% of you monthly income before taxes. Overall debt cost (debt-to-income ratio) should range from 33% to 36% of your pre tax monthly income. A simple formula can be used to figure out your housing expense and debt-to-income ratio based on what you earn per year.

For example, to figure out the suggested housing expense to qualify for a federal mortgage, multiply a yearly salary of $30,000 by .29 (29%), and then divide that by 12 (months in a year). To figure out the debt-to-income ratio the same formula is used. For example, to calculate the suggested debt-to-income ratio for a federal mortgage, multiply $30,000 by .41 (41%), and then divide by 12.

The following chart will show you the federal suggested housing expense and debt-to-income ratio for individuals earning $30,000 up to $120,000.

Pre-Tax Yearly Income	housing expense: 29% of monthly income	debt-to-income ratio: 41% of montly income
$30,000	$725	$1,025
$40,000	$967	$1,367
$50,000	$1208	$1,708
$90,000	$2,175	$3,075
$120,000	$2,900	$4,100

Keep in mind that a lender will also consider the cost of real estate taxes, homeowners and flood insurance when determining if you are qualified.

It is possible to exceed the recommended debt to income ratio for a federal or conventional mortgage and still qualify if you:

make a large down payment

clearly show that you can pay more toward your housing expenses

have quite a bit of money saved

net worth is enough to repay the mortgage loan even though income is low

have a very good credit history or limited credit use

accept lower mortgage terms

have received money from a nonprofit agency

Federally Backed Mortgages

The disadvantages of federally backed mortgages include the following:

The type of homes these mortgages are available for are limited and might not suit you. According to HUD, for FHA mortgages there are different loan limits in different parts of the country. Typically, single unit homes have a loan limit ranging from "$115,200" in "low cost" areas to "$208,800" in "high cost" areas. Multi-unit houses carry higher loan maximums.

The advantages of federally backed mortgages include:

A greater likelihood of qualifying compared to conventional loans. Individuals shopping for mortgages who have lower annual incomes may find federal mortgages more attractive.

Also, by completing the FHA's Homebuyer Education Learning Program (HELP), you may become eligible to receive a reduction in your initial FHA mortgage insurance premium "from 2.25% to 1.75%" of your new home's purchase price.

Next: What is a Mortgage?

Updated: Nov 2005