The Federal Housing Administration, or FHA, was established during the Great Depression with the primary objective of making home ownership possible for more people. FHA mortgages are backed by the Federal Housing Administration in case you default on the loan. The FHA does not actually lend people the money to buy a home – the FHA guarantees the loan, so if a borrower defaults on his mortgage, the FHA will reimburse the lender. Mortgages obtained on the private market without FHA help are known as "conventional" mortgages. With a conventional mortgage, lenders do not have the same guarantee.
By purchasing a home, you are moving in the direction of increasing your financial security; you are actually taking part in an investment that can appreciate similar to stocks or bonds. When you first purchase your home, your down payment is your only stake. With adequate maintenance, a home will usually increase in value each year. And, of course, improvements to make the home more comfortable for you, will typically also add to the equity. Equity is the difference between the market value of the property and the amount of the mortgage.
Homeowners get significant tax breaks that are not available to renters; however, tax laws are continually changing. While accurate at the time of this writing, it is critical that the borrower verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.
Current historically low interest rates have contributed to a significant improvement in the housing market over the past few months. It was good news for housing when
data for pending home sales showed an unexpected 5.9% jump in May, 2012 vs. April, 2012. Many have taken this as a signal that interest rates are nearing their bottom, and will likely begin to increase over the next several months. In addition, while some area markets are stabilizing, the S&P/Case-Shiller Index of Property Values showed that the decline in home prices during the month of April, 2012 was at its lowest since November, 2010, indicating that although home prices are starting to stabilize and are soon expected to increase, they are still down even as the housing market sees some improvement.
When it comes to making that move, either into buying a home for the first time, or moving up into another home, you'll need to establish a solid plan for yourself.
Determine Your Financial Situation
You need to determine whether you have enough money saved up to cover the down payment and the closing costs, and whether you'll have enough income to cover the new mortgage payment and all of your other bills. This will determine the price range of a home which you're capable of buying.
In a previous post, we suggested paying bills down by paying all bills on time, and by paying more than the minimum amount due on the bill with the highest interest rate. While this is an excellent strategy, it is only one of many that can be used to pay down your debt. In this post we will present several other good strategies for getting your debt paid down.
When dealing with your credit, the best approach is to head off problems before they occur. If you are having problems paying your bills, contact your creditors immediately and try to work out a modified payment plan with them that reduces your payments to a more manageable level. Don’t wait until your account has been turned over to a debt collector.
Making your money work is a very important aspect of saving money and building wealth. One way to facilitate this is by setting up an online savings account. For the most part, online savings accounts function in the same way as normal (brick-and-mortar) bank savings accounts. However, in the case of online savings accounts, you do not ever have to visit a bank physically in order to transact business. Online savings accounts offer a number of advantages -- in the past few years, millions of people have signed up for them. As you might expect, there are also disadvantages of online savings accounts.
A typical real estate purchase transaction varies somewhat with the various state laws and regional customs and is quite complicated, requiring high levels of understanding about the process. Knowing what is involved can help both buyers and sellers by taking a lot of stress and guesswork out of the process. The following steps are usually involved in such a transaction:
Even with the present condition of the housing market, it is still possible to obtain a mortgage with a low down payment requirement if you know how to go about exploring the available options.
Most conventional loans require a 20 percent down payment, but many lenders now offer conventional loans that require lower down payments -- sometimes as low as 5 percent. Regardless of the loan type, if the down payment amount is lower than 20 percent, lenders usually require the homebuyer to purchase PMI (Private Mortgage Insurance). PMI is essentially an insurance payment made to the lender as a means to set off any losses the lender may incur in the event that the monthly mortgage payments are not able to be satisfied. Many lenders will allow a down payment of as little as 5% if PMI is paid.
Your credit report contains information about where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy. A good credit rating is very important.
For most people, buying a house is the largest purchase they will ever make. But the potential payoff is huge -- a home of your own, a place for your children to grow up and, in the absence of another rare major market reversal, a good long-term investment.
You've decided that at some point in the future, you want to own your own home, but you're not yet ready to do so. Saving for a down payment on a house is no simple thing but it is certainly possible, especially if you have a plan. While saving for a down payment cannot be accomplished overnight, it can be done in less time than you may think; and the sooner you begin saving, the sooner you'll be able to reach your savings goal with less strain on your budget.
If you have limited credit history, or past or current credit issues, you may have a problem qualifying for credit cards. It is possible to get an unsecured credit card, even with bad credit, but it can be very difficult to do so.
Your debt-to-income ratio, or debt ratio, is typically represented as the percentage of your income that goes toward paying your debt. A lot of lenders, especially mortgage and auto lenders, use your debt ratio to evaluate your credit worthiness, i.e., how much of a loan you can handle. For example, a mortgage lender will use your debt ratio to figure out the mortgage payment you can afford after your other monthly debts are paid. Debt ratio considerations are as important as your credit score. While your credit score reflects how responsible you are in paying your bills, your debt ratio gives potential creditors additional insight into your personal finances. Your debt ratio shows just how much debt you're juggling as compared to your income. It's possible that someone with a good credit score could be turned down for a mortgage or home loan because lenders feel the borrower is simply carrying too much debt, despite a steady history of on-time payments.
A "short sale" generally means that a home is being sold for less than the owners owe on their house. In many cases, the house is "upside down" in value, meaning the owner owes more money on the house to one or more lenders than it is currently worth. Short sale homes don't necessarily have anything wrong with them; their owners simply choose to sell for one reason or another. The following provides information about how to go about purchasing a short sale house:
What is a Debt Ratio?
Your debt-to-income ratio can be a valuable number -- some say as important as your credit score. It's exactly as it sounds: the amount of debt you have compared to your overall income.
A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. Speaking precisely, DTIs often cover more than just debts; they can include certain taxes, fees, and insurance premiums as well. Nevertheless, the term is a set phrase which serves as a convenient, well-understood shorthand in the mortgage industry. There are two main kinds of DTIs, as discussed below.
When considering the sources of funds for down payment and closing costs, different types of lenders have different rules. Generally, mortgage lenders want borrowers to meet the down payment requirement with funds they have saved because this indicates that the borrower has the discipline to save. For this reason, some may restrict the amount of the down payment that is provided via other sources.
According the Public Broadcasting Service, credit scoring models did not exist before the 1970s. Instead, lenders and loan officers used personal judgment, such as a person's appearance, job, street address, etc. when assessing a loan application. Unfortunately, human judgment is not nearly as reliable as a mathematical model based on verified data in determining credit risk.
*Disclaimer – Loan guidelines change often and may have recently changed; be sure to consult with your lender about current requirements.
Two Ratios – Front End and Back End
Lenders use two types of debt ratios in determining a person’s ability to qualify for a mortgage. The front end ratio is real estate-related debt (mortgage principal and interest, real estate taxes, real estate insurance) divided by gross income. The back end ratio is real estate-related debt plus other liabilities listed on your credit report divided by gross income. Therefore, a person’s front end and back end debt ratios would be the same if there is no additional debt listed on the credit report. However, since most people have additional debt listed on their credit report, most borrowers have a higher back end ratio.