If you have established yourself with a good base of credit now is the time to help your long term finances by investing in a home. Perhaps you want to stay in an apartment like environment. Lawn care, house maintenace just holds no interest and free time is to be spent traveling or on the links rather than with a paint brush. Then a condo makes more sense. Rent is money that is gone forever - Mortgage Payments at least will return in a form of an overall asset or net worth.
In some cases the first big step is to invest in real estate rather than live in your own real estate. Then good credit is a must. Many pitfalls are related to real estate investments. Regardless of the glowing stories shown on TV about how easy real estate investing is, only a small percentage of the investors make any real money. In some cases the market is overcrowded and it takes real money and luck to be a big winner.
Of course Big Ticket Items can mean a new car or dream vacation. These can be appropriate and very rewarding if planned for and supported by sensible use of good credit.
Big Ticket Loans
Be careful of the one credit factor that mortgage companies look at, debt to income ratio. When going after a home or condo loan keep in mind the first factor is the income to loan ratio that the lender looks at. In general it is cosidered that a real estate loan is limited to 2½ times the yearly income. If your total income is $1,000,000.00 per year then you should be able to buy a $250,000.00 home or condo. This varies somewhat by lender.
Debt to Loan Ratio
Currently the best way to figure how much of a real estate loan you can carry is a formular that many lenders use. It is sometimes referred to as the 28/36 qualifying ratio. For a conventional loan those numbers refer to two percentages that are used to understand aspects of your (reccommended) debt load ratio.
The First Number, 28%, indicates the amount of your monthly gross income allowed for housing expenses. This includes the loan principal and interest, taxes and insurance (both mortgage and hazard) and homeowner's association dues ( P I T I ). For example, if your total household income is $75,000.00, your monthly income is $6,250.00. At 28 percent, you can afford to spend $1,750.00 on mortgage payments (PITI) per month.
The Second Number, 36%, or back ratio, refers to the percentage of the monthly gross income that a lender permits for total housing expenses. Sometimes reffered to as recurring debt this includes credit card payments, car loans, and other obligations that will not be paid off within a relatively short period of time (less than 12 months) or being ongoing like child support .
Traditional loan underwriting is restricted to the 28/36 ratio. The FHA (Federal Housing Administration) loan ratios are typically 29/41, allowing a higher debt load for both housing expenses and recurring debt. For a VA loan, the debt to income ratio should not exceed 41% of your monthly gross income. Also dependant on underwriting is the down payment which can range from 0% to 25% of the loan amount. The down payment amount - hence the financed amount can affect the interest percentage rate.
Now, many progressive lenders embrace electronic underwriting. These Artificial Intelligence programs have the ability to analyze credit report history, job stability, reserves, income streams and more with resulting ratios in the 40/49 range for well qualified borrowers. These tend to have an increased interest rate on the loan amount.
The Truth About Loans
The harder a loan is to qualify for, the better the terms and the lower the interest rate. That means that over the life of the loan, the less it costs in real money! The terms can mean how easy the loan is to pay off early and what happens should you want to turn the property later .... The eaiser a loan is to qualify for, the less advantageous the terms and the higher the interest rate. The cost in real dollars over a 30 year loan can be a factor of 2X ie, double - raise the rate so that it costs just an extra $83.00 a month or $1,000 per year and that means an extra $30,000.00. Feel that SUV vanish from the garage?
