When you want to buy new clothes, you simply go to the
store, make your selection and pay – cash or credit. Buying
a new home, because of the price tag, is a lot different.
Few people have the ability to go shopping, choose a house
and pay cash.
Rather, most people pay a cash down payment on their new
home and finance the remainder of the purchase price with a
mortgage loan. A mortgage requires you to pledge your home
as the lender’s security for repayment of your loan.
Since financing is a key issue in most sales contracts, one
of the first things you should do is to figure out how much
house you can afford – how large of a mortgage loan you
qualify for. Lenders use certain guidelines to determine the
mortgage amount they will lend you. The two guidelines used
are housing expenses and long-term debt.
Lenders generally say that housing expenses (including
mortgage payments, insurance, taxes and special assessments)
should not exceed 25 percent to 28 percent of your gross
monthly income. Long-term debt is usually defined as monthly
expenses extending more than 10 months into the future and
should not exceed 33 percent to 36 percent of your gross
monthly income. These numbers may vary according to loan
type, credit and downpayment. Many loans today allow up to
33 percent for the housing to income ratio and 38% for the
total debt to income ratio.
A wide selection of mortgages is available to you in the
marketplace. Your challenge is to select the loan terms that
are most favorable to you.