Selecting Financing

Taking the First Step

Contrary to what you may have heard, home financing can be easy to obtain. This section is designed to walk you through the process step by step.

1. The first steps in the loan process are getting pre-qualified and selecting a lender. If you haven't already, this is the perfect time to begin our pre-qualification process. It allows you to take both steps at once.
2. You should then give some consideration to the type of mortgage you want. Review our description of the most common loan products, click here.
3. The next step in the loan process is the loan interview with your local banker. Be prepared to provide financial records including pay stubs for the last 30 days and three months of bank statements. Also, be ready to talk about your capacity to repay the debt of the loan, your credit history and your financial ability to make a down payment and meet closing costs.
4. To begin the pre-approval process for a mortgage loan, click here.

Determining How Much House You Can Afford

There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments relative to your income and other expenses.

The following ratios may vary, and each application is handled on an individual basis. So the guidelines are, in fact, just guidelines. There are many affordable programs, both government and conventional, which have lenient requirements for low- and moderate-income families.

As a general rule of thumb, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income. The ratio for FHA is 29% of gross monthly income.

Monthly housing costs include the mortgage principal, interest, taxes, and insurance. If your annual income is $38,000, your gross monthly income is $3,000, times 28% = $840. So you would probably qualify for a conventional home loan that requires monthly payments of $840.

Any expenses that extend 11 months or more into the future are called long-term debts, such as a car loan. Total monthly costs, including long-term debt, should not exceed 33% to 36% of your gross monthly income for conventional loans. Using the same example, $3,000 x 36% = $1,048. Therefore, your total monthly housing expenses, along with any monthly long-term debt, cannot exceed $1,048. For FHA, the ratio is 41%.

Housing Expense

• Conventional: Maximum allowable monthly housing expense 26% - 28% of gross monthly income.
• FHA: 29% of gross monthly income.

Housing Expense and Long-Term Debt

• Conventional: Maximum allowable monthly housing expense and long-term debt 33% - 36% of gross monthly income.
• FHA: 41% of gross monthly income.

One method of determining just how much to spend for housing is to compare your monthly income with monthly long-term obligations and expenses. Be sure to only include income you can definitely count on.

When budgeting to buy a home, it is important to allow enough money for additional expenses, such as maintenance and insurance costs. If you are purchasing an existing home, gather information on cost averages and maintenance costs from previous owners to help you better prepare for homeownership.

Homeowner's insurance, also known as hazard or property insurance, is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed-dollar amount that may be insufficient to rebuild a badly damaged house.

Finding Out How Much You Can Borrow

Is your dream home within your budget? To get an idea of how much house you can afford based on your expendable income, click here.

Financing Options

Small, local financial institutions offer several types of mortgages to suit your various needs. As a general rule, you should take these factors into consideration when selecting a mortgage program.

• Your current financial picture.
• How you expect your finances to change in the future.
• How long you intend to keep your house.
• How comfortable you are with your mortgage payment changing.

Click here for a general description of available loans.

Available Loans

Fixed Rate Mortgage.
A mortgage in which the interest rate does not change during the entire term of the loan.

Adjustable-Rate Mortgage (ARM).
A mortgage that allows your community bank to adjust its interest rate periodically on the basis of changes in the economy.

Jumbo loan.
A loan that exceeds $417,000.

Balloon Mortgage.
A mortgage that has level monthly payments that will amortize over a stated term, but that provides for a lump sum payment to be due at the end of an earlier specified term.

Home Improvement Loan.
A mortgage that enables eligible borrowers to obtain financing to remodel, repair, and upgrade their existing homes or homes that they are purchasing.

Refinance Transaction.
The process of paying off one loan with the proceeds from a new loan using the same property as security.