{"id":120,"date":"2013-04-10T05:13:07","date_gmt":"2013-04-10T05:13:07","guid":{"rendered":"http:\/\/www.gatewoodmedia.com\/exodusfinancialllc.com\/?page_id=120"},"modified":"2021-07-21T20:00:41","modified_gmt":"2021-07-22T00:00:41","slug":"home-buying-preparation","status":"publish","type":"page","link":"https:\/\/www.exodusfinancialllc.com\/?page_id=120","title":{"rendered":"Home Buying Preparation"},"content":{"rendered":"

[vc_row][vc_column][vc_column_text]\"iStock_000009988691XSmall\"<\/a><\/p>\n

2013 Housing Market Remains Strong For Sellers<\/p>\n

How Much Home Can You Afford?<\/b><\/p>\n

Planning to buy a home this year? Although home prices are rising and mortgage rates have climbed out of their lifetime lows of 2012, the market remains ripe for buyers as compared to recent years.<\/p>\n

Home buyer purchasing power remains near all-time highs and low and no downpayment mortgages are readily available, including the Conventional 97 program from Fannie Mae which allows for a 3% downpayment with or without a downpayment gift, and is available in all 50 states.<\/p>\n

Start by checking your budget against today\u2019s mortgage rates. Get today\u2019s rates and see for how much home you\u2019ll qualify.<\/p>\n

Among the most common questions from a home buyer is \u201cHow much home can I afford?\u201d The answer, however, like many things, is that \u201cit depends.\u201d<\/p>\n

There are no concrete rules for how much home you can afford, or how big your mortgage should be. This is because the way that a mortgage lender calculates your maximum purchase price will be different from how you would calculate it yourself.<\/p>\n

Let\u2019s look at both approaches to home affordability.<\/p>\n

Using DTI To Determine Maximum Purchase Price<\/b><\/p>\n

When a mortgage lender calculates a home buyer\u2019s maximum home purchase price, it doesn\u2019t actually consider the purchase price of the home. Rather, it looks at the buyer\u2019s expected mortgage loan size and the current mortgage rates to determine the expected monthly mortgage payment, and then compares that figure to the buyer\u2019s monthly income.<\/p>\n

This comparison is known as the Debt-to-Income Ratio. Sometimes called DTI, the ratio has two components.<\/p>\n

Debt-to-Income : Front-End Ratio<\/b><\/p>\n

The first component of the debt-to-income ratio is the \u201cfront-end ratio\u201d. Front-end ratio compares the expected monthly housing payment to a buyer\u2019s monthly income, where \u201chousing payment\u201d includes all of the following obligations:<\/p>\n

\u2022\u00a0Monthly principal + interest payments
\n\u2022\u00a0Monthly real estate taxes due
\n\u2022\u00a0Monthly homeowners insurance due
\n\u2022\u00a0Monthly dues due to an association<\/p>\n

There is no maximum limit for a front-end ratio, but lenders prefer to see front-end DTI of 28% or less. In other words, no more than 28% of a buyer\u2019s monthly income should be allocated to housing payments.<\/p>\n

Debt-to-Income : Back-End Ratio<\/b><\/p>\n

The second component of debt-to-income ratio is the \u201cback-end ratio.\u201d Back-end ratio compares not just the monthly housing payments against a buyer\u2019s monthly income, but all monthly payments.<\/p>\n

Back-end ratio accounts for all of the following monthly obligations a home buyer may have:<\/p>\n

\u2022\u00a0Monthly housing payment(s)
\n\u2022\u00a0Monthly minimum credit card payments
\n\u2022\u00a0Monthly child support or alimony
\n\u2022\u00a0Monthly car payments for a car loan or lease
\n\u2022\u00a0Monthly payments to an installment loan such as a timeshare<\/p>\n

In general, banks want to see a back-end ratio of 36% or less, however, having a DTI over 36% will not automatically disqualify your mortgage application. Many lenders allow up to 45% debt-to-income.<\/p>\n

Mortgage Lenders Use FICO Scoring Model<\/b><\/p>\n

There are numerous credit reporting companies and you\u2019ve likely seen their ads on TV or online. However, in the mortgage world, there are three companies which matter most \u2014 Equifax, Experian, and TransUnion. Collectively, these three firms are called the \u201cmajor credit bureaus\u201d and each sells a multitude of credit scoring products.
\nFor mortgage purposes, each sells one credit score of consequence to mortgage applicants:<\/p>\n

\u2022\u00a0Equifax : Equifax Beacon 5.0
\n\u2022\u00a0Experian : Experian\/Fair Isaac Risk Model v2
\n\u2022\u00a0TransUnion : FICO Risk Score 04<\/p>\n

When a mortgage lender \u201cpulls your credit,\u201d these are the three credit scores which are reviewed. Your lender will then take the middle of the three scores, and this will be your assigned credit score. For example, if your credit scores are 620, 640, and 700, your \u201cscore\u201d is 640. As another example, if your credit scores are 700, 719, and 720, your credit score is 719. Credit scores are not rounded up or averaged.<\/p>\n

Credit scores are called FICO scores, named after the Fair Isaac Co., a pioneer in the credit scoring space.
\n
\nHow To Boost Your Credit Scores<\/b><\/p>\n

When you order a credit report, along with your credit scores, the credit bureaus often offer several ways by which you can improve your credit score.<\/p>\n

For people whose credit scores are low, this can be a roadmap for FICO improvement. For people whose credit scores are very high, it may be extraneous information; you can\u2019t get \u201cbonus points\u201d for having an extra-high FICO.<\/p>\n

Take the credit bureaus\u2019 recommendations under consideration, but remember that there are only a few fool-proof ways to improve your credit score.<\/p>\n

1.\u00a0Pay your bills on time, every time.
\n2.\u00a0Keep your credit card balances low as compared to your total available credit.
\n3.\u00a0Apply for store charge cards only when absolutely necessary.
\n4.\u00a0Pay doctor and utility bills when they\u2019re due.
\n5.\u00a0Keep old credit cards open, and use them periodically.<\/p>\n

Ideally, your credit card balances should not exceed 30 percent of the card\u2019s available balance. If you are having trouble meeting this requirement for a high credit score, ask your credit card company to raise your credit limit. Lastly, if you\u2019ve had a derogatory event on your credit report, \u201cbad credit report.\u201d<\/p>\n

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