Those who qualify for a mortgage loan may now have a once-in-a-generation opportunity to buy the home of their dreams, thanks to lower prices and low interest rates.
Bank On It
Buying a home is getting more affordable by the day. “In all the economic misery, it’s the one thing that’s getting better,” says Daniel McCue, a research analyst at harvard university’s joint center for housing studies.
In fact, those who qualify for a mortgage loan may now have a once-in-a-generation opportunity to buy the home of their dreams, thanks to lower prices and low interest rates.
Interest rates for 30-year, fixed rate mortgages have recently dropped to around 4.5 percent, and the number varies from week to week.
But consider that the monthly payment on a $160,000, 30-year, fixed-rate loan two years ago at 6.37 percent would have cost $997 per month. Today, at 4.5 percent, that same loan would cost just $810 per month.
So, while loans are harder to come by these days—at least for those with iffy credit histories—there’s still plenty of mortgage money available at incredible rates.
Those poised to benefit most from the current economic situation include:
Buyers who have good credit, stable employment and a down payment saved, including younger, first-time buyers who’ve been waiting for prices to drop so they can get into the housing market.
Sellers who still have plenty of equity in their homes, so they can afford to drop their selling price and use their equity to trade up to a nicer home.
If you fall into one of these categories—or even if you aren’t sure—check out the following questions and answers about mortgages:
Q. So, I want to buy a home. How do I figure out how much I can borrow?
A. Getting pre-approved before you actually put in an offer on a home is the best way to find out if you qualify and for how much.
First, look at your monthly gross income, before taxes and contributions. That’s how much you actually make, not how much you take home.
Lenders use what’s known as a front-end ratio, which is computed as a percentage of your gross monthly income. The front-end ratio signifies the payment you can reasonably afford, from a lender’s point of view.
The front-end ratio for a Federal Housing Administration (FHA) loan is 29 percent. For a conforming conventional loan it’s 33 percent.
This means if your monthly gross income is $4,000, to qualify for an FHA loan, your monthly principal, interest, taxes and insurance (PITI) payment should be no more than $1,160. For a conventional loan, it should be no more than $1,320.
The back-end ratio reflects your new mortgage payment plus all recurring debt. It, too, is computed on your gross monthly income. The back-end ratio is higher than the front-end ratio.
For an FHA loan, the back-end ratio is 41 percent. For a conforming conventional loan, it’s 45 percent. That means if your car payment is $300 and credit card bill is $100, your monthly recurring debt is $400.
The FHA loan payment of $1,160 PITI plus $400 recurring debt is $1,560. The back-end ratio is $1,640—or $4,000 times 41 percent—so you’d qualify for an FHA loan under those circumstances.
The conventional loan payment of $1,320 PITI plus $400 recurring debt is $1,720. The back-end ratio is $1,800—or $4,000 times 45 percent—so you’d also qualify for a conventional loan.
Q. How much should my down payment be?
A. Under current lending conditions, it may be necessary to come up with 20 percent down for a conventional loan. But lenders take many factors into consideration, so don’t let that frighten you away.
If you file your tax return prior to buying a home, and if you’re entitled to get money back, many tax preparers will advance you the amount of the refund.
Gift funds can also be used to supplement down payments if certain criteria are met.
FHA has loan programs requiring just 3.5 percent while the Department of Veterans Affairs (VA) still offers no-money-down loans.
Q. Don’t FHA loans only apply to inexpensive homes?
A. Depends on what you mean by inexpensive. In hopes of spurring more activity, the maximum limit for an FHA loan has been increased. In the Tampa area it’s now $292,500 and in the Sarasota-Manatee area it’s $442,500.
You can buy an awfully nice home in today's market for that kind of money.
Q. My credit record has a few blemishes. Can I still get a loan?
A. Sure. Very few people have absolutely perfect credit. But you should do everything you can to clear up any outstanding issues so you’ll score as high as possible.
Recent statistics from the Mortgage Bankers Association show that 53 percent of mortgage loan applicants are being approved today versus 63 percent a year ago. “When an applicant is denied a loan, it’s usually because of an issue over verifiable income, lack of a down payment or too much revolving debt,” says Peggy A. Thomas, president of Thompson Mortgage and Financial Services.
Also, some applications are declined because the appraised value of a home is less than the requested loan amount. Overly-cautious appraisals have been a bane for buyers and sellers during the current downturn.
For a conventional loan, says Thomas, most lenders are looking for a minimum credit score of 680—although the mid-700s is considered optimal—while FHA and VA like to see a score of at least 620.
Below 600 will be a tough sell. It’s still possible to get a loan, but not at the most favorable rate.
BUYER RESOURCES
HOME INFORMATION
WWW.GTAR.ORG
On the Greater Tampa Association of Realtors (GTAR) Web site, you can find licensed Realtors, search for homes and see area market reports. There’s also a home search function.
www.multiplelistingservice.com
The Multiple Listing Service (MLS) contains virtually all existing homes for sale and is the definitive resource for Realtors. But there’s lots of consumer information as well.
www.florida-homebuyer.com
Florida Homebuyer West Coast’s Web site contains the most comprehensive database of new-home communities to be found anywhere, searchable using an array of criteria.
www.zillow.com
This site is fun and informative. Enter your address—or the address of a home you’re coveting—and you’ll get a picture from Google Earth as well as estimated value and other information. See what your neighbors’ homes are worth, too, just for kicks.
MORTGAGE INFORMATION
http://www.hud.gov/fha/choosefha.cfm
The Web site for the Federal Housing Administration’s (FHA) loan program has everything you need to know about FHA loans and FHA-approved lenders. There’s even an “Ask the Expert” component.
www.freddiemac.com
Consumers don’t deal directly with Freddie
Mac, which buys mortgages from lenders, packages mortgages into securities and sells the securities to investors. But its Web site is an excellent resource for first-time buyers.
www.fanniemae.com
Like Freddie Mac, consumers don’t deal directly with this federally chartered mortgage underwriter. But its Web site helps you find a lender or a housing counselor who can offer advice on buying a new home or on holding on to the home you have.
www.homeloans.va.gov
The Veterans Affairs (VA) Web site outlines home-ownership programs designed specifically for vets—and there are a number of them.