How Much Can I Afford For A House Payment by MaryJeanMenintigar


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									                                        Frequently Asked Questions

Q: What is the first step when looking for a home loan?

A: Most experts recommend that you should get pre-qualified for a loan first. By being pre-qualified, you
will know exactly how much house you can afford.

Q: What can I afford?

A: You can usually obtain a mortgage valued at between two and three times your annual household
income, assuming you have an average debt load. What you can afford ultimately depends on how much
income and how much debt you have. In general, lenders don’t want borrowers to spend more than 28 – 35
percent of their gross income per month on a mortgage payment or more than 36 – 50 percent on debts.
American Heartland Mortgage will be happy to roughly calculate what you can afford and pre-qualify you
for a loan.

The price you can afford to pay for a home will depend on six factors:
    1. gross income
    2. cash available for down payment and reserves as required by the lender
    3. your outstanding debts
    4. your credit history
    5. the type of mortgage you select
    6. current interest rates

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio.
It is determined by calculating your projected monthly housing expense, which consists of the principal and
interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If
you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be
added to your PITI.

This ratio should fall between 28 to 35 percent, although some lenders will go higher under certain
circumstances. Your total debt-to-income ratio should be in the 36 to 50 percent range.

Q: How is a home’s value determined?

A: You have several ways to determine the value of a home. An appraisal is a professional estimate of a
property’s market value, based on recent sales of comparable properties, location, square footage, and
construction quality. This service varies in cost depending on the location and price of the house.

A comparative market analysis is an informational estimate of market value performed by a real estate
agent based on similar sales and property attributes. Most agents offer free analyses in the hopes of
winning your business. You can also get a comparable sales report for a fee from private companies that
specialize in real estate data. You also can find comparable sales information available on various real
estate internet sites.

Q: Is a low offer a good idea?

A: While your low offer in a normal market might be rejected immediately, in a buyer’s market a
motivated seller will either accept or make a counteroffer. Full-price offers or above are more likely to be
accepted by the seller, but there are considerations involved;

*Is the offer contingent upon anything, such as the sale of the buyer’s current house? If so, a low offer,
even at full price, may not be as attractive as an offer without that condition.
*Is the offer made on the house as is, or does the buyer want the seller to make some repairs or lower the
price instead?
*Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less
than the asking price may be more attractive to the seller than a full-price offer with a financing

Q: What contingencies should be put on an offer?

A: Most offers include two standard contingencies; a financing contingency, which makes the sale
dependent on the buyer’s ability to obtain a loan commitment from a lender, and an inspection contingency,
which allows buyers to have professionals inspect the property to their satisfaction. A buyer could forfeit
his or her deposit under certain circumstances, such as backing out of the deal for a reason not stipulated in
the contract.

Q: What does the average American’s credit look like?

A: On average, today’s consumers are paying their bills on time. Fewer than 4 out of 10 have ever been
reported as 30 or more days late on a payment. Only 2 out of 10 have ever been 60 or more days overdue
on any credit obligation. 85% of all consumers have never had a loan or account that was 90+ days
overdue, and less than 10% have ever had a loan or account closed by the lender due to default.

54% of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit, and loans –
everything but mortgages. Nearly 30% carry more than $10,000 of non-mortgage-related debt as reported
to the credit bureaus.

The typical consumer has access to $12,190 on all credit cards combined. More than half of all people with
credit cards are using less than 30% of their total credit card limit. Just over 1 in 8 are using 80% or more
of their credit card limit.

60-65% of the population has a credit score greater than 700
15% of the population has a credit score less than 620

Q: How is my credit score calculated?

A: There are five types of information used to calculate a credit score at any given point in time. Each
type of information counts as a percentage of the total score.

Payment History            = 35%
Amounts Owed               = 30%
Length of Credit History   = 15%
New Credit                 = 10%
Types of Credit in Use     = 10%

These percentages are based on the importance of the five categories for the general population. For
particular groups, such as people with relatively short credit histories, the importance of the categories may

Q: Will my credit score drop if I apply for new credit?

A: If it does, it probably won’t drop much. If you apply for several credit cards within a short period of
time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk, but
most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short
period of time. The score counts multiple mortgage or auto inquiries in any 14-day period as just one
inquiry. In addition, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring.

Q: What exactly is bad credit?
A: There are numerous types of credit report problems that could cause a lender to reject your application
for a loan. Such problems include: missing a credit card payment, defaulting on prior a loan, filing for
bankruptcy in the past seven years, or not paying your taxes. Other black marks on a credit report could
include a judgment filed against you (i.e., non-payment of spousal or child support) or any collection

Q: What if there is a credit reporting mistake on my report?

A: problems are the main reason home-buyers are denied a loan. The first step to clearing up your credit is
to get a copy of your credit report to make sure that the negative credit information is indeed accurate.

If you feel that your credit report is wrong, experts say it’s best to take it up with the organization or
company claiming you owe them money. But if you have been late paying your bills, regroup by paying in
full and on time for six months to a year to prove to the lender that the late payments were an aberration.
You can order a copy of your own credit report from all three reporting agencies by calling toll free
(877)322-8228. You may learn more about how items on your credit report influence your credit score at

Q: How do I clear up bad credit?

A: There is no fast and easy way to repair damaged credit that took months or years to occur. The law
allows negative information to appear on an individual’s credit record from seven to 10 years. The first
step is to check your existing credit record. Anyone can obtain copies of their own credit report free of
charge if they have been turned down for credit recently. If the credit report is correct, take care of any
outstanding delinquent obligations first.

Q: How do bankruptcies and foreclosures stay on a credit report?

A: Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will
not consider loaning to a borrower until good credit is reestablished. The circumstances surrounding the
bankruptcy can also influence a lender’s decision. For example, if you went through a bankruptcy because
your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through
bankruptcy because you overextended personal credit lines and lived beyond your means, the lender will
probably be less inclined to be flexible. Unpaid tax liens can remain on your report for up to 15 years.

Q: What do I do if I get turned down for a loan?

A: Increasing numbers of loan applicants are finding ways to buy their own home despite past credit
problems, a lack of credit history, or debt-to-income ratios that fall outside of traditionally acceptable
ranges. Ask the lender for a full explanation, then appeal the decision in writing.

Q: Where do I get information on consumer credit laws?

A: For information on consumer credit laws, contact the National Foundation for Consumer Credit, 8701
Georgia Avenue, Suite 507, Silver Springs, MD 20910; call (301)589-5600.

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