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Hawaii Realty International, LLC
1888 Kalakaua Avenue, Suite C312
Honolulu, HI 96815
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Debt-to-Income Ratios
To determine your maximum mortgage amount,
lenders use guidelines called debt-to-income
ratios. This is simply the percentage of your
monthly gross income (before taxes) that is
used to pay your monthly debts. Because there
are two calculations, there is a "front"
ratio and a "back" ratio and they
are generally written in the following format:
33/38.
The front ratio is the percentage of your
monthly gross income (before taxes) that is
used to pay your housing costs, including
principal, interest, taxes, insurance, mortgage
insurance (when applicable) and homeowners
association fees (when applicable). The back
ratio is the same thing, only it also includes
your monthly consumer debt. Consumer debt
can be car payments, credit card debt, installment
loans, and similar related expenses. Auto
or life insurance is not considered a debt.
A common guideline for debt-to-income ratios
is 33/38. A borrower's housing costs consume
thirty-three percent of their monthly income.
Add their monthly consumer debt to the housing
costs, and it should take no more than thirty-eight
percent of their monthly income to meet those
obligations.
The guidelines are just guidelines and they
are flexible. If you make a small down payment,
the guidelines are more rigid. If you have
marginal credit, the guidelines are more rigid.
If you make a larger down payment or have
sterling credit, the guidelines are less rigid.
The guidelines also vary according to loan
program. FHA guidelines state that a 29/41
qualifying ratio is acceptable. VA guidelines
do not have a front ratio at all, but the
guideline for the back ratio is 41.
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| Example: |
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| If you make $5000 a month,
with 33/38 qualifying ratio
guidelines, your maximum
monthly housing cost should
be around $1650. Including
your consumer debt, your
monthly housing and credit
expenditures should be around
$1900 as a maximum. |
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The Olden Days
In the "olden" days, when someone
wanted a home loan they walked downtown to
the neighborhood bank or savings & loan.
If the bank had extra funds laying around
and considered you a good credit risk, they
would lend you the money from their own funds.
It doesn’t generally work like that
anymore. Most of the money for home loans
comes from three major institutions:
- Fannie Mae
(FNMA - Federal National Mortgage Association)
- Freddie Mac
(FHLMC – Federal Home Loan Mortgage
Corporation)
- Ginnie Mae
(GNMA – Government National Mortgage
Association).
This is how it works now:
You talk to practically any lender and apply
for a loan. They do all the processing and
verifications and finally, you own the house
and now you have a home loan and you make
mortgage payments. You might be making payments
to the company who originated your loan, or
your loan might have been transferred to another
institution.
The company you make your payments to very
rarely owns your loan. They are the "servicer"
of your mortgage. They are called the servicer
because they are simply "servicing"
your loan for the institution that does own
it.
You see, what happens behind the scenes is
that your loan got packaged into a "pool"
with a lot of other loans and sold off to
one of the three institutions listed above.
The servicer of your loan gets a monthly fee
from the investor for processing payments
and taking care of your loan. This fee is
usually only 3/8ths of a percent or so, but
the amount adds up. There are companies that
service over billions of dollars of home loans.
Three-eighths of a percent on a billion dollars
is a tidy income.
In fact, mortgage servicing is where lenders
make the real money. The entire system of
originating mortgages, including wholesale
lenders, mortgage brokers and mortgage bankers
is designed so that servicers get loans into
their portfolio -- hopefully at a "break
even" level -- but often at a loss. Mortgage
servicing is where they make their profit.
Once your loan has been packaged into a pool
and sold to Fannie Mae, Freddie Mac, or Ginnie
Mae, the lender gets additional funds so they
can make more loans (to service in their portfolio)
and sell to those institutions, so they can
get more money, and so on....
This is the cycle that allows institutions
to lend you money. |
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Your First Step Toward Buying a Home
When preparing to buy a home, the first thing
many homebuyers do is look at "homes
for sale" ads in newspapers, magazines
and listings on the internet. Some potential
buyers read "how-to" articles like
this one. The next thing you should do –
before you call on an ad, before you talk
to a Realtor, before you shop for interest
rates – is look at your savings.
Why?
Because determining how much money you have
available for down payment and closing costs
affects almost every aspect of buying a home
– including how you write your purchase
offer, the loan programs you qualify for,
and shopping for interest rates.
Mortgage Programs
If you only have enough available for a minimum
down payment, your choices of loan program
will be limited to only a few types of mortgages.
If someone is giving you a gift for all or
part of the down payment, your options are
also limited. If you have enough for the down
payment, but need the lender or seller to
cover all or part of your closing costs, this
further limits your options. If you borrow
all or a portion of the down payment from
your 401K or retirement plan, different loan
programs have different rules on how you qualify.
Of course, if you have enough for a large
down payment, then you have lots of choices.
Your loan choices include such varied programs
as conventional fixed rate loans, adjustable
rate mortgages, buydowns, VA, FHA, graduated
payment mortgages and all the varieties of
each.
Shopping Rates
A very important reason you need to have at
least some idea of your down payment is for
shopping interest rates. Some loan programs
charge a slightly higher interest rate for
minimal down payments. Plus, the interest
rates for different loan programs are not
the same. For example, conventional, VA, and
FHA all offer fixed rate loans. However, the
rates vary from one program to another.
If you shop lenders by phone, the loan officer
will be able to tell which programs fit and
quote you rates accordingly. However, if you
are shopping on the internet, you have to
have some idea of your loan program on your
own.
Writing Your Offer
Another reason you need to have a clue about
your down payment is because it affects how
you write your offer to purchase a home. Not
only are you required to put your down payment
information in the offer, but different loan
programs have different rules which also affect
how you write your offer. This is especially
important when dealing with FHA and VA loans.
If you are asking the seller to pay all or
part of your closing costs, you have to be
certain your loan program allows what you
are asking. For smaller down payments, lenders
allow the seller to pay less closing costs
than for larger down payments. Some loan programs
will allow a seller to pay certain types of
costs, but not others.
Finally, your down payment also affects your
ability to qualify for a loan. When you make
a small down payment, lenders are fairly strict
about having you conform to their underwriting
guidelines. For larger down payments, they
will tend to make allowances or exceptions
to the rules.
Conclusion
As you can see, the down payment affects every
choice you make when you buy a home. Although
you should look at ads, familiarize yourself
with neighborhoods, learn about prices, and
read as much as you can - when you get ready
to take action – the first thing you
should do is figure out how much money you
have available for the purchase. |
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