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Low Down Payment Loan Qualification


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TERMINOLOGY

To be considered for a low down payment loan, you generally need to have:

  • Sufficient income to support the monthly mortgage payment
  • Enough verified cash on hand to cover the down payment
  • Sufficient cash to cover normal closing costs and related expenses (explained below)
  • A good credit background that indicates your payment history or willingness to pay
  • Sufficient appraisal value which shows the house is at least equal to the purchase price
  • In some instances a cash reserve equivalent to two monthly mortgage payments
Closing costs or settlement costs are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average closing costs run approximately 2% to 3% of the house price. This percentage may vary depending on where you live.

Closing costs include the loan origination fee (if not already paid) points prepaid homeowner's insurance appraisal fee lawyer's fee recording fee title search and insurance tax adjustments agent commissions mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you a more exact estimate of your closing costs.

Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount. For example 2 points on a $100000 loan equals $2000. Companies may charge 1 2 or 3 points in upfront costs in addition to the down payment. The more points you pay the lower your interest rate will be. In some cases you may be able to finance the points.

So How Much of a Mortgage Can You Afford?

There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

It is important to remember that the following ratios may vary and each application is handled on an individual basis so the guidelines are just that -- guidelines. There are many affordability programs both government and conventional that have more lenient requirements for low and moderate income families.

Many of these programs involve financial counseling for low and moderate income people interested in buying a home and in return offer more lenient requirements.

Generally speaking to qualify for conventional loans housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal interest taxes and insurance often abbreviated PITI. For example if your annual income is $300 your gross monthly income is $2500 times 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.

Any expenses that extend 11 months or more into the future are termed long term debt such as a car loan. Total monthly costs including PITI and all other long term debt should equal no greater than 33% to 36% of your gross monthly income for conventional loans. Using the same example$2500 x 36% = $900. So the total of your monthly housing expenses plus any long term debts each month cannot exceed $900. For FHA the ratio is 41%.

Maximum Allowable Monthly Housing Expense

26% - 28% of gross monthly income - Conventional

29% of gross monthly income - FHA

Maximum Allowable Monthly Housing Expense and Long Term Debt

33% - 36% of gross monthly income - Conventional

41% of gross monthly income - FHA

One way to determine how much to spend for housing is to compare your monthly income with monthly long term obligations and expenses. Use the worksheet "Evaluating Your Financial Resources to determine how much money you can spend on housing. Be sure to only include income you can definitely count on.

When budgeting to buy a home