Bay-Vanguard - About the Mortgage Process

Buying your first home can be one of the most exciting and rewarding financial decisions you will make. However, if you are not informed of the options that are available and are not aware of all the details involved in the mortgage buying process, the purchase of a home could very well be the most uncertain, frustrating purchase of your life.

The following 4 steps (Pre-Qualifying, Loan Types, Loan Application & Processing, Closing) will help you gain a fundamental knowledge about obtaining a mortgage loan enabling you to make informed decisions throughout the process. Please refer to the Glossary of terms as needed.

Step 1: Pre-Qualifying

A mistake frequently made among home buyers is locating the house they want to buy first. It is often the case that potential buyers unknowingly choose a home out of their price range. Time and possibly money is wasted by beginning the approval process to only find that the buyer is unable to afford the payments. This problem is eliminated by going to a financial institution first to determine what size mortgage is affordable.

The financial industry uses basic guidelines to determine your maximum mortgage value. One such guideline is the 28/38 percent ratio to compare your gross income before taxes to your expenses. The first number of the ratio (28) is the maximum percent of the buyer's gross income that should go for housing expenses. These expenses are referred to as PITI payments - Principal, Interest, Taxes, Insurance.

The second number (38) is the maximum percent of the buyer's gross income that should be allocated to all of their credit expenses (including housing expenses, and any installment debt (i.e credit cards, auto loans).

Here is an example based on the buyer's annual gross income totaling $35,000. According to the 28/38 ratio:

28% = .28 x 35,000 = $9,800/yr.
9,800 / 12 = $816.67/mo.
$816.67 per month can be used for PITI payments.

Now, let's assume taxes are $1,800 and insurance is $300 per year.
9,800 - (1800 + 300) = $7,700/yr.
$7,700 / 12 = $641.67/mo.
$641.67 per month can be allocated for the mortgage payment (principal and interest).

Another way to check how much one can afford is to use one of the many calculators available today. Check out our quick and easy Affordability Calculator.

Is there any way to make it possible to buy a house which is a little bit out of your range? Actually there are a few options which can help you make the sale happen.

Obtain a lower interest rate on the mortgage. A lower rate will decrease the monthly payment.
Increase the down payment. increasing the amount of money you put down decreases the amount that you will have to finance, therefore, decreasing the monthly payment.
Check into FHA programs (Loans that are insured by the Federal Housing Administration) that use a more favorable ratio of 29/41 percent.
Look into Community Homebuyer programs (loans that are funded by the state government and sponsored by the Federal National Mortgage Association) that offer more lenient guidelines of 33/38 percent.
Consider other mortgage programs that qualify the buyer at an initially lower payment, such as Graduated Payment or Equity Programs, three year and five year adjustable rate programs, or five (5/25) and seven (7/23) year balloon programs.
Be sure to weigh these alternatives carefully. Although the initial rate on adjustable rate and balloon programs are lower than fixed rate programs, the rate may increase above the rate of a conventional 15 or 30 year loan at a later adjustment period. Graduated Payment programs can actually add to your outstanding loan balance (negative amortization).
Try to find a lending institution that makes portfolio loans or in house loans. Since these institutions are using their own funds to back the loan, and only have to conform to their underwriting requirements, they may have more flexible guidelines for borrowers.

The underwriting department of the financial institution makes the final decision about the buyer's income-to-debt ratio being acceptable. The underwriters will check to see if the income is stable and increasing on a steady basis, and if the down payment is sufficient.

Continue to Step 2

4 Steps To Your Mortgage

Step 1: Pre-Qualifying