Mortgage Finance Blog

Go Big or Go Home!

February 8th, 2013 1:46 PM by Diego Quintero

The process of homeownership is rather simple to explain. However, there is no argument that if you aren’t well informed, you can lose lots of money! According to Brian O’Connell, rates are climbing quickly and many current home owners have taken advantage, but timing is crucial.

Homeowners who refinanced achieved a median interest rate reduction in the fourth quarter of 2012 of 33%, according to Marketwire. Refinanciers have clearly taken advantage of the low rates, but if homebuyers delay they may not be able to afford higher loan amounts, as it will cost more to borrow.

What does that mean? Basically, as rates increase the buyer is settling for a smaller home, lesser amenities, and/or inferior finishes. Higher rates are directly correlated to higher debt-to-income ratios which can cause problems with underwriting approvals.

Debt-to-income ratios are heavily weighed in determining an applicants eligibility for any type of home loan, whether a government or a conventional loan. Your debt to income ratio is calculated as a percentage of your debt in relation to your income. For example, if you earn $3000 per month and your expenses are $1000 per month, you would have a debt-ratio of 33%. Your maximum allowable ratio is specific to the loan scenario and is also based on other strengths/weaknesses of the file.

Generally, however, you are eligible for loan approval if there is a 44.9% debt ratio or less. Your debt ratio is calculated by the monthly payments of;

  • credit card debt
  • car loans
  • student loans
  • & lastly, proposed mortgage payments to include, principal, interest, taxes, insurance, mortgage insurance, HOA fees, plus any district taxes, if applicable.

Divide this monthly total by your gross monthly income (before taxes). As an exercise, tally up your monthly expenses (as indicated above) and calculate your debt ratios to get an idea of a manageable monthly payment for your new home. Include only the kinds of debt that are reporting to the credit bureaus, not expenses such as groceries, utilities, etc. Your calculator will give you an answer as a percentage (i.e., .33 or 33%).

Contact your trusted mortgage broker to help you determine the finer numbers, or for the time being, you can explore by using a mortgage calculator. The calculator can provide fairly close estimates, at least enough to get you started.

Most importantly, get educated on the mortgage process by local non-profit groups & take advantage of the lowest interest rates the market has ever provided. Keep in mind, as rates increase a home buyer will be able to afford lesser space and amenities. There is only one way for rates to go...before they increase, get the home that is best for you and your family. Bigger is better especially when it is affordable!

Your trusted mortgage broker,

Diego L. Quintero, RI/MLO

Posted in:General
Posted by Diego Quintero on February 8th, 2013 1:46 PM

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