Qualifying Calculators
Nearly everyone wants to buy a house, as opposed to renting a property or accommodation from a landlord. There are so many positives to owning your own place including:
Can make all the alterations that you want
Can live in the house until you want to move
Don't have to pay increased rent each year Can be free to decorate to your heart's content
Can express your individuality
Don't have to live with random strangers No restrictions on what you can and cannot do, e.g. throw a party
Buying A House
Apart from the obvious above benefits, the idea of settling down and starting a life appeals to many people, so buying a house is a popular thing.
Deciding to buy a house is a complicated procedure. Along with all the home hunting that is needed there are other items to consider such as the following items:
Hiring a realtor
Having home inspections carried out
Having an appraisal on a property
Negotiating the sale price
Preparing a contract
Financing the transaction
Of all the above items it is the final one that is the most difficult in the majority of cases. Financing a real estate transaction can sometimes be a very difficult endeavor.
Borrowing Money
In order to buy a property you have to be able to submit to the seller the amount that you have agreed on for the property. In most cases buyers do not have access to the total amount that the seller is asking for and have to either borrow the money from a friend, relative, bank or loan company.
The vast majority of buyers will borrow money from a loan company or bank, either as a straight loan or mortgage. The two are different and are explained below:
Loan:
A loan is a lump sum of cash that you borrow from a bank or Loan Company. A loan has a fixed interest rate e.g. 8% per year and you pay off the total amount of the loan, after the interest has been added, over a set period, usually a few years.
Loan company or bank will calculate the final value of the loan, complete with interest, and you will pay off that value, in identical installments (usually monthly, but can be bi-weekly), until all the balance has been paid.
For example if you borrow $15,000 at a rate of 8% per year, and wish to pay the loan back over 3 years then the amount you will have to pay is:
%15000 * 1.08^3 (8% over 3 years) = $18895 (the total amount of the loan)
Monthly payment = $18895 / 3*12
= $ 315 per month
Mortgage
A mortgage is the more popular way to finance a real estate deal, as usually the amount of money that is needed to bridge the difference between capital and asking price is large.
In effect a mortgage is a contract you sign that pledges the property that you are buying to the lender (usually a loan company or a bank) as a guarantee for payment of the loan debt. This means that the bank will lay a claim on your house or property until you have paid off your mortgage loan. If you fail to make the re-payments you could be foreclosed on and the bank repossess the property.
A mortgage loan is normally paid off in installments, with the person paying off the sum borrowed over either a 15-year or 30-year period.
Just deciding to take out a loan does not guarantee that you will be accepted for one. Banks and loan companies set out specific criteria for a loan or mortgage and unfortunately not all people are accepted for a loan or mortgage.
Both banks and loan companies vary with the criteria that they use to determine if they will offer a loan or mortgage. You can also be accepted for a loan or mortgage, but not for the amount you may require.
Generally banks or loan companies will offer you a loan if you meet the following criteria that, most managers use for allocating loans:
Good credit history: I.e. no overdue loans, no prior loan defaults, and no history of bankruptcy. Ability to pay off the loan: I.e. yearly income that will allow you to pay off the loan repayment each month.
Whether you meet the requirements of the bank or loan company will be up to them to decide, however you should look for financing as soon as you decide to purchase a specific house, i.e. once you know the price and amount of money that you need to get a loan or mortgage for.
It is important to guarantee that you can pay the loan amount for many reasons. The following real life case highlights many of the reasons why securing the loan is needed before you get too far into a deal.
Example:
A couple, Mary-Kate and Ashton from New York found their dream home just outside central park. They were both amazed by the property and its location and condition that they decided that they wanted to buy it there and then. Both Mary-Kate and Ashton had good jobs, in marketing and finance, and thought that, although they didn't have enough capital they would still be able to buy the home with a mortgage.
Assuming that they would get a loan easily they finalized the deal, spent money on appraisals and inspections as well as agent and attorney costs. Feeling confident with the deal they signed the contract without any clause refereeing to the need for financing the deal.
With their house secured Mary-Kate and Ashton went to the bank to get a lone and to their utter amazement they were rejected! Stunned the two decided to cut their losses; the fees, the appraisal and inspections had all cost money. What they failed to realize was that in their anticipation of a loan they had signed to contract without a clause to cancel the transaction if they failed to get the financing needed. As a result the two were liable to buy the property, even though they could not afford it. In the end they had to get a lower loan and sell some of their possessions to pay for the house.
What Mary-Kate and Ashton had wrongly assumed was that they would be accepted for the loan that they wanted; they had good jobs and a good credit history. Unfortunately they did not understand how loans were assessed.
In most cases the proposed re-payments each month, for the mortgage that you are applying for should not exceed 29% to 35% of your gross monthly income. Coupled with this is the fact that the long-term debt should not be more than 36% to 41% of your gross monthly income, where long term debt includes; school loans, car loans, credit card, mortgage re-payment etc.
Lessons Learned
In Mary-Kate and Ashton's case the loan they wanted exceeded theses guidelines. If the two had looked into loans before agreeing to buy the house they would have maybe realized that they could not afford the property.
You don't have to go to a loan company or bank to get an indication of whether or not you will be accepted for a loan. Qualifying calculators are available that can determine whether or not you are suitable for the loan you are looking for.
Loan qualifying calculators are free and easy to use. They are generally available over the Internet and are simply to access.
Using a qualifying calculator should be the first step you take to looking at the financing you can afford, before you see the bank or loan company manager.
In effect the qualifying calculator is a computer program that you input variables into to find out if you will qualify for a loan by calculating the amount of income that you will need to be approved for the loan that you are looking at.
With a mortgage-qualifying calculator you normally have to submit both property and mortgage information.
Property Information
This information relates to the property that you are interested buying with the loan money and includes
· Sale price of home
· Annual home insurance
· Annual property tax
Mortgage information
This information relates to the mortgage that you are interested in taking out from the bank or Loan Company:
Down Payment (every mortgage needs one)
Interest rate Term time (in years)
Monthly debt
Once you have inputted the values that you need you will also have to set the qualifying ratios that you want to determine if you are allowed a loan. These ratios are the Front and Back ratios, and are a percentage usually 28% and 36%, to coin side with the maximum debt levels advocated by the banks and loan companies.
The ratios basically provide an upper and lower income limit to be able to repay the loan.
What A Qualifying Calculator Provides
Once all the calculations variables are in the qualifying calculator the calculator will provide the following information:
Total monthly loan payment: Principle Interest+ Hazard Insurance + Property Tax Total monthly debt payment: Loan payment and debt payment Total monthly PMI payment: Principle Mortgage interest 28% Qualifying income 36% Qualifying income
For example, assume that a person wishes to buy a $120,000 home, with a down payment of only $5,000. The interest rate for the mortgage they are looking of is 8% and the term is 30 years.
Annual property tax is $1,438 (1.2% of price of home) and Annual home insurance is $518 (0.43% of price of home) and monthly debt is $950. With these values the calculator returns the following:
Total monthly loan payment =$1,006.82 Total monthly debt payment = $1,956.82 Total monthly PMI payment = $86.25 28% Qualifying income = $46,845.85 36% Qualifying income = $68,102.33
The results of the calculation show that if you earn $46,845.85 per year you will most likely be accepted for a loan. However if you earn $68,102.33, you will definitely be accepted, as this is a better income to have for this loan.
