The Path to Home Ownership
Tips from Mortgage Experts to budget and save for your first home.
Home Sweet Home
If you’re like most Americans, owning your own home is a major part of the American Dream. Buying a home is typically the largest purchase most people will ever make. Finding and financing a home can involve complex decisions, but help is available with the MTC Federal Mortgage Experts.
Saving for a home purchase takes commitment, research, and sacrifice. It is an emotional time for the homebuyer, who will experience excitement, pride, achievement, fulfillment, and independence. The advantages of owning your own home are well documented. You:
- Build equity (or ownership) in property, which you may sell at a profit
- Can deduct mortgage interest on your tax return
- Are protected against rent increases (though not property tax increases)
- Can rent your property to produce income
- Can often get more living space for less money
- Can borrow against home equity
So where do you start? Set goals and budget to save the money needed to achieve your American Dream.
BUDGETING AND GOAL SETTING
Managing your money will always be a lifetime project. It becomes even more important as you prepare to buy a house. Buying a house takes a lot of energy and preparation, so strong organization can help make the process go smoothly.
HOW MUCH HOUSE CAN I BUY?
Knowing how much you can afford as a monthly mortgage payment is an important starting point because it allows you to estimate how much house you can buy. Use the following chart to calculate monthly principal and interest payments.
So the principal and interest on a $100,000 loan at 5% interest would be calculated like this:
$5.37 X 100 = $537.00
5% interest factor loan amount in thousands monthly payment
To arrive at the rest of the monthly payment, take 1/12 of the annual property taxes and insurance and add it to the monthly principal and interest. That will equal the total monthly payment: principal, interest, taxes and insurance (often referred to as PITI).
As a part of the qualifying process, the lender will use ratio calculations to determine whether you have adequate stable income to support the monthly mortgage payments. There are two ratio calculations performed by the lender: the housing debt-to-income ratio and the total monthly debt-to-income ratio.
Lenders usually assume you can afford to spend 28% of your total income on your mortgage (principal and interest), property taxes and homeowners insurance. But even if you meet this test, you can still be turned down if your mortgage expenses and other regular debt payments such as auto and student loans are more than 36% of your total income.
Calculate your ratios:.
EXAMPLE 1: Housing Ratio – $800 (Housing Expense) / $3000 (Monthly Income) = .2666 or 27% Housing Ratio
EXAMPLE 2: Debt Ratio – $1100 (Housing and Remaining Debt Expenses) / $3000 income= .3666 or 37% Debt Ratio
The amount of the loan you can actually qualify for is based on the value of the property and the interest rate, along with your credit standing, annual income and net worth.