Homing In on Your First Mortgage
Ruby slippers alone won't get you into the home of your dreams. It takes planning, research and calculation, calculation, calculation.
Buying your first home is an arduous task. When I first bought my first home, I struggled to understand interest rates, taxes and the mysteries of mortgages; more than once I thought, "Who do you have to be to understand this stuff, Keynes, Greenspan or Volcker?"
This is not to scare you into remaining a tenant for the rest of your life, but to give you faith: Shopping for a mortgage is something anyone can do — I am living proof that the inexperienced can succeed. A few months after I began the process, I closed on a three-bedroom ranch and wrote checks totaling more than the cost of my undergrad college education and my last two cars combined! But in the spirit of making home buying semi-painless (so you can move on to the really fun stuff, like collecting paint chips and buying furniture), here's the give-it-to-me-straight approach to mortgages, even after the subprime crash which has really shaken up the mortgage lending industry.
How Much House Can I Afford?
The short answer: Any house for which the total of your monthly mortgage payments, property tax, and insurance doesn't exceed 28 percent of your monthly gross income.
A slightly longer answer: Any house for which all of the above plus other debt payments such as credit cards and car loans total no more than 36 percent of your monthly income. Beyond these basic ratios, there are other variables that will affect how high or low your mortgage payments will be. One is interest rates: The higher the interest rate, the higher the mortgage payment. Another is down payment: How much can you pony up? The type of mortgage you get also comes into consideration.
How Big Should My Down Payment Be?
It doesn't have to be 20 percent. Although the no money down mortgages are thankfully lying on the scrap heap of financial history, you can find lenders who will consider down payments below 10 percent depending on your credit rating. There are, however, many circumstances that call for shelling out more — or less.
Put down more if:
- Your lender recommends it because you have "dings" on your application, such as a spotty employment record or a history of late credit card payments.
You want a relatively expensive house. If you qualify for a mortgage of only $150,000 and you desperately want that four-bedroom Georgian that costs $200,000, you'll have to come up with a $50,000 down payment.
- You want, for whatever reason, to lower your monthly payments.
Put down less if:
- You're eligible for one of several mortgage programs that help home buyers. Check online for the government incentives available in your area.
- You don't have an emergency fund of at least two months' worth of mortgage payments. Most first-time home buyers don't have a lot of savings, so the lenders will check carefully to ensure that buyers don't wipe themselves out by the time they walk out of the closing.