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September 2014     

How Much Home can you Afford?

Whether you are a first time home buyer or a seasoned pro, meeting with a loan officer can be an intimidating encounter. As you divulge your most intimate financial records to this stranger, you realize that the fate of your homeownership dream is in his hands.

Fortunately, the stress of this meeting can be dramatically alleviated by knowledge of your finances and the impact they have on your credit worthiness. It is also important to remember that most loan officers want you to get into a home; however they need to ensure that you do not represent a risky investment.

There are a number of different variables that lenders consider when you apply for a loan, including the following:

Cash for down payment and closing costs. Traditionally an acceptable down payment was 20 percent of the cost of the home; however the abundance of new mortgage derivatives today allow some buyer to get into homes with little or no down payments.

Credit history. Though average or poor credit will not preclude you from receiving a loan, it will probably result in a higher interest rate. Find out what your credit score is before filing a loan application, that way you will have plenty of time to dispute any inaccurate information.

Employment and debt. Lenders perfer to lend to borrowers who have a stable work history and have not switched employers recently or who are coming off a period of unemployment. This is not to say that your loan will be denied if your employment history is slightly tarnished, it just means that the more stable your record the better. Debt is typically measured by debt ratios (more information below) that measure your earning power against the amount of debt that you owe on.

If a debt-to-income ratio is too high, then there is a good possibility that the mortgage will not be approved. Until recently, a typical qualifying ratio was 28/36. The first number is termed the front end ratio and it is determined by dividing your proposed monthly housing expense (principal, interest, taxes, and insurance - also called PITI) by your gross monthly income (income before income tax).

The second number, back end ratio, is determined by dividing your total monthly debt (including proposed PITI) by your gross monthly income. A borrower with good credit, front end ratio under 29, and back end ratio under 37 would have no trouble qualifying for a mortgage.

Now that you know the different factors that impact the amount of home you can afford, your next meeting with a loan officer will go much more smoothly. I recommend that you perform these calculations before speaking with a lender so that you already have a good idea of where you stand.

Buying a Home - Avoid Major Credit Purchases

If you are looking to buy a home in the next year make sure to stay away from major purchases on credit. Lenders typically use a debt to income ratio to determine how much financing will be available to the buyer. The amount of debt you have incurred, for example a car loan, will have a direct effect on how much home you can afford. Credit report inquiries are also recorded and a large number of inquiries could have a negative impact on your credit score.

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Creating Extra Storage Space

One common complaint that is often expressed by homeowners is that their home does not have enough storage space. As a lack of space has more to do with how space is utilized, this problem is extremely easy to fix.

  • Extend upper cabinets all the way to the ceiling. Many kitchens waste valuable space when they stop 6 inches below the ceiling.

  • Make your closets more accessible. Low closet doors complicate access to the top shelf of a closet. Oversize doors - even ceiling high models - make it easier to store bulky items on high shelves.

  • Go to the garage. Even in garages where parking is a tight fit there is room in the space above a cars hood for wall mounted cabinets to store little used items - closed cabinets are recommended.

  • Annex the back of a closet to create built in storage for an adjacent room. A shallow cabinet wedged between the wall studs can serve as an extra kitchen cupboard or a family room bookcase.

Existing-Home Sales Continue to Climb in July

Existing-home sales increased in July to their highest annual pace of the year, and the ongoing decline in distressed sales reached an important milestone, according to the National Association of Realtors®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 2.4 percent to a seasonally adjusted annual rate of 5.15 million in July from a slight downwardly-revised 5.03 million in June. Sales are at the highest pace of 2014 and have risen four consecutive months, but remain 4.3 percent below the 5.38 million-unit level from last July, which was the peak of 2013.

Lawrence Yun, NAR chief economist, says sales momentum is slowly building behind stronger job growth and improving inventory conditions. "The number of houses for sale is higher than a year ago and tamer price increases are giving prospective buyers less hesitation about entering the market," he said. "More people are buying homes compared to earlier in the year and this trend should continue with interest rates remaining low and apartment rents on the rise."

Yun does warn that affordability is likely to decline in upcoming years. "Although interest rates have fallen in recent months, median family incomes are still lagging behind price gains, and mortgage rates will inevitably rise with the upcoming changes in monetary policy," he said.

Total housing inventory at the end of July rose 3.5 percent to 2.37 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace. Unsold inventory is 5.8 percent higher than a year ago, when there were 2.24 million existing homes available for sale.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage fell for the third consecutive month to 4.13 percent in July from 4.16 percent in June, and remains the lowest rate since June 2013 (4.07 percent).

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