You can jump to a specific question or simply scroll thru the list. I recommend reading thru the complete list the first time as some questions build upon previous answers.

SOME GENERAL RULES OF THUMB
or party talk

Qualifying: The approximate monthly payment you can qualify for is one week's paycheck. So if you make $4,000 a month, all other things being equal (which they rarely are), you could afford a $1,000 house payment.

Payment: Your house payment will be roughly equal to 1% of the loan. So a $1,000 monthly payment is roughly a $100,000 loan.

NO, NONE OF THESE FIGURES ARE EXACTLY RIGHT, but they do quickly point you in the right direction.

If you would like to figure your own projected monthly payments more closely, download the P&I payment factors below. Keep in mind your complete monthly payment will be higher than this since it will include both tax and insurance payments in addition to the Principle and Interest. Budget accordingly. (We also have the tax and insurance figures for the DFW area if you need them)

download P&I payment factor chart

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JUST FOR FUN
Everyone gets a kick out of seeing what payments are on outrageous loan amounts. I don't know why, but in the classes I teach and during loan Evaluations, once we are sitting around relaxing, people are always asking me "What would the payment be on a $1,000,000 (or some such) loan."After I figure the payments they always go "WOW, what kind of income would it take to qualify for one of those loans."Then of course they want to know what these people do for a living. It's fun to see how the other half lives. So here are a few off the wall examples (and a couple of real life ones for good measure) :

Amusing Payment& Qualifying grids

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SERIOUS BUSINESS
Now that we have the frivolity and old wives tales out of the way let's get down to some serious information. You will hear many strange things out there on the streets. Most are attempts to make a complicated procedure easy to understand. Unfortunately many of these sayings take on a life all their own simply because people want them to be true or it is the only portion of the mortgage gobbledygook they clearly understood. No, people aren't simple, but sometimes the teller tends to oversimplify the information.

I am sorry to tell all you spreadsheet guys that you CANNOT build a spreadsheet to see how much house you can afford! You can figure payments & amortization on a spreadsheet, but that's about it. There is so much more to qualifying for a home loan than just dollars and cents.

A spreadsheet treats everyone equally but an underwriter doesn't!
Underwriters must look at the whole picture. Why should a person who has changed jobs & addresses often, has little money in the bank and has been late regularly on their bills qualify for as much house or get as low an interest rate as someone who has been on their job for 20 years, has $30,000 extra dollars in the bank and has never been late on a debt in their life? Just looking at things logically you can understand why Qualifying Ratios are less than half of the qualifying puzzle.

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QUALIFYING RATIOS
If you haven't clicked over to the Amusing Payment & Qualifier Grids a quick look will help you understand some of the income/outgo/interest rate factors that affect qualification. Some of these relationships can be very enlightening.

Ideally, an underwriter would prefer that no more than a certain percentage of your gross income be spent on HOUSE PAYMENT (called the Front End Ratio) and no more than a certain percentage of your gross income go towards HOUSE PAYMENT + ALL DEBTS (called the Back End Ratio).

These ratios were derived to compensate for and still allow money for gas, clothes, groceries, insurances, utilities, etc. Which means that if you charge any of these items you are getting double dinged.

Ratios refer to the aspect of qualifying that relates to income, but keep in mind that ratios are less than half of the qualifying criteria - stability factors have more weight in the qualifying process than do income or outgo).

see the last paragraph in SERIOUS BUSINESS above.

Different loan types include different debt loads into their allowable ratio calculations. Therefore there is really no way to compare them directly, but here are the ratios as stated in the manual. Keep in mind that these are just guidelines and can fluctuate up or down quite a bit depending upon how strongly your stability factors come into play.

 

CONVENTIONAL = 28%/36% (I've seen loans approved with ratios as high as 75%)

FHA = 28%/41% (FHA counts debts differently than does Conventional guidelines so their 41% usually is less than Conventional's 36%)

VA = has no front end ratio but has a back end ratio of 41% plus they require a residual net spendable income left over after paying all bills. The more people in the family the more residual income they require which makes sense.

VA's is truly the guideline that makes the most sense.

Even quoting ratios like that gives a similarity to the guidelines that doesn't exist. To give you an idea of how differently each Mortgage type counts debts let me cite one incidence:

Conventional loans say if you have an installment loan that will last for less than 10 months (regardless of payment size) it doesn't have to be counted.

FHA guidelines say if you have an installment loan that will last for less than 12 months AND the payments are less than $125 it doesn't have to be counted- all loans with payments above $125 must still be counted.

As you can see Conventional guidelines could allow a person to qualify for a significantly larger loan amount. e.g.: at an 8% rate a $400 car payment (or credit card debt) could make a difference of $39,623. Sobering thought!

As I mentioned before, these are just guidelines. Depending upon the stability factors and the loan type I have seen Conventional loans go as high as 75% on the back end ratio and I have heard of back end ratios as high as 90%.

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WHEN ARE HOUSE PAYMENTS DUE AND WHEN ARE THEY LATE?
Except for some "B" loans and bank loans, mortgage payments are due on the first of the month - YOUR HOUSE PAYMENT IS LATE ON THE 2ND. National standards state you are given a grace period of 15 days before a late penalty is assessed, but your payment is late on the 2nd and will be reported that way. This means you should mail your payment in time for it to reach your mortgage company by the first, not mail it on the first.

The reason for the 15 day grace period is to allow for the vagaries of the mail and to accommodate holidays, etc. that can cause paychecks to be delayed by a few days occasionally. How does that affect you? Not at all if your mortgage company reports thru the credit bureau because credit bureau standards say a loan must be one payment period late before it can be reported, but unfortunately many don't. If you are so lucky as to have a company that doesn't report . . . a word to the wise from my own personal experiences. I used to work the 15 day float, but it came back to bite me once.

Credit ratings, not the same as credit scoring, go from a high of one and a low of nine. One (1) meaning you have had no lates and a nine (9) being a repossession. I consistently paid my payments on the 13 -15th so my mortgage company gave me an eight (8) rating. It almost cost me the loan on my new home. I had to furnish the cancelled checks for 24 months house payments to prove I had never been 30 days late.

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WHAT IS THE BEST LOAN TYPE?
Well, the 30 year fixed is the most common, but that doesn't really answer your question. What is the best loan type for you depends solely upon your situation and how long you expect to live there. see also Synopsis of Loan Types

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WHAT IS AMORTIZATION?
Amortization is the process of totally paying off your debt. If you have a 30 year amortization then your payments are calculated so that your loan pays off on the 30th anniversary.

Mortgage interest is not "added on" to your loan balance upfront like a bank loan. Instead it is calculated monthly based upon the unpaid balance. This means you have some control over the amortization period. If you were to pay more than your payment amount (it does not have to be an extra payment, you can pay an extra $1 if you like) this money is automatically applied to your principle which reduces your loan balance and the interest paid in the following months. One extra Principle and Interest payment a year reduces a 30 year note by almost 9 years.

OK, SO WHAT IS NEGATIVE AMORTIZATION?
Positive amortization is when your monthly payment covers at least your principle and interest payment. Negative amortization is when you're monthly payment does not cover the complete principle and the interest due. This means your loan balance will increase each month by the amount of the shortfall instead of decreasing. (see also Brief Synopsis of Each Loan Type. Look at the Buydowns, GPM, and ARMS sections) You usually only find this type of loan in "B" or Sub Prime loans.

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WHO OR WHAT IS FANNIE MAE AND FREDDIE MAC?
Fannie and Freddie are collectively the biggest secondary lenders for mortgage loans in the world. In other words they buy the loans that we and other lenders originate.

Primary lenders (your local mortgage company) originate the loans and the secondary lenders buy the closed loans from the primary lenders ensuring there is always money available to make a mortgage loan.

In the 60's and early 70's when the secondary markets were not as fully developed as they are now, there were times when money wasn't available to buy a home. As a Realtor then many of my Buyers made loan application only to discover AFTER the loan was processed that the bank or mortgage company had run out of money and could not close their loan. We counted upon making loan application at least 2 times in those days. The secondary market ensures there is always a supply of money available to make you a home loan.

While Buyers never have direct contact with these secondary lenders (they do not make loans to the public), Buyers deal with the effects of them in every aspect of the loan. If you, your property, your loan terms, the loan limits, how your loan is processed and the paperwork meet the standards of FNMA or FHLMC then your loan is said to be CONFORMING. This makes your loan the most easily saleable product which gives you the lowest rate.

If ANY ONE of these standards is not met then you are said to have a NONCONFORMING loan and you get a nonconforming interest rate. Most people think a Nonconforming loan is a Jumbo loan or a loan above the FNMA/FHLMC loan limits of $417,000 (as of 2/2/06). Loan amount (not sales price) is one reason, but as I said you must meet ALL standards or you have a nonconforming loan and interest rate.

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Each type of Realtor has completely different duties to you and ways to work with you. You must be very clear which type of Realtor you are working with to understand how to protect yourself. Click HERE to read the actual portion of the act that determines how a Realtor can legally deal with you.

Seller Only

Buyer (or Intermediary as it is know in other states)

Buyer Only

Seller Only: As the name implies these agents have a fiduciary duty with the Seller to put the Seller's interests before the Buyer. They are obligated to get the highest price and best terms for the Seller. They are obligated to pass on to the Seller any private or confidential information they can discover about the Buyer that would give the Seller an advantage in negotiations. They can give advice only to the Seller. If you are a Buyer working with a Seller's Agent it is akin to playing poker with your cards held so everyone can see your cards but unfortunately you can't see anyone else's.

A Seller's agent will try to get the Buyer to:

• pay all of their own closing costs (even tho it is customary for the Seller to pay a portion of the Buyer's costs),
• pay for the appraisal
• pay full price

How do you spot a Seller's Agent? Well, the listing agent is ALWAYS a Seller's Agent so you obviously do not want to call the listing agent to get information about a home. Other agents can also decide to represent the Seller or be a subagent of the Seller instead of you. The only sure way is to ask, agents must disclose to you who they work for at the first significant contact.

Buyer ONLY Broker: As the name implies these agents have a fiduciary duty with the Buyer to put the Buyer's interests above the Seller's. They are obligated to get the lowest price and best terms for the Buyer. They are obligated to pass on the Buyer any private or confidential information they can discover about the Seller that would give the Buyer and advantage in the negotiations. They can give advice only to the Buyer.

Contrary to what some Seller Only agents and Intermediaries would have you believe, the Buyer does not pay the commission if they have a Buyer Only agent. The Seller typically has offered to pay 6% to get their home sold. They will pay 3% to whatever company lists their home and 3% to whatever company sells it.

A Buyer Only agent will try to get the Seller to:

• pay some of the Buyer's closing costs ( it is customary for the Seller to pay a portion of the Buyer's closing costs)
• pay for the appraisal
• + get the Buyer the lowest price and best terms

A Buyer's agent is obligated to research the values in the area, tell you actual value (or as close as they can come) and recommend the appropriate offering price and negotiating strategies.

How do you spot a Buyer's Agent? They will be listed in the Yellow Pages under Buyer Brokers and THEY DO NOT LIST PROPERTIES so they don't have any divided loyalties. If you talk to an agent with a company that lists properties they cannot be a Buyer Only Broker. At best they can be an Intermediary.

Buyer Broker or Intermediary: This is the confusing option. In most other states this broker is known as an Intermediary which I believe is a more understandable nomenclature. Saying they are a Buyer Broker implies they work for the Buyer WHEN THEY DON'T! By law they do not represent the Buyer or the Seller. They cannot give advice to anyone and all parties are basically left to their own devices except the Seller of course since they always have a Seller Broker (the listing agent). In other words the only person left hanging is the Buyer.

That's the technicality, but the practicality is that the Buyer Broker tends to do what is most comfortable to them which means they lean more towards Seller representation.

In an ideal world the Seller and Buyer both will have their own agent. If you choose to work with an Agent who also lists properties be aware you will need to be totally conversant with all procedures and will have to work to protect your interests. We can help, but since we can't be there when the Realtor writes the contracts and aren't privy to all conversations we are limited in what we can do.

What we have found works best is EDUCATION. We take the time to educate you before the process begins and are available to help at any time during the purchase/closing process. If we are doing your financing it is legal for us to help you with all aspects of the process. FINANCIER$ is here to help so don't ever hesitate to call!