» Introduction
» Understand Your Purchase
    » Minimize the Cash You Need
    » Acceptable Source of Down Payment
    » Fixed Rate or Adjustable Rate Mortgage?
» Understand Your Market

Owning a home is part of the American Dream. It means big tax breaks, a piece of land to call your own, and possibly appreciation. Purchasing a home is not difficult, but you will have to commit some time (maybe a lot of time, depending on your needs), energy, and money to the process. You will have to share your financial details to a lender to get the loan you need. You will have to part with some hard-earned cash. But, if the process seems daunting, don't despair. We've put together the tools to help you and in the end, you will have a home to call your own!

Tip: If you are planning on a life event in the next couple years, such as marriage, a child or transfer with your employer, think carefully about buying. It is unusual for a house to appreciate enough in that time to recoup your costs.

Basically, you need to have four items to obtain a mortgage.
• Enough stable income to qualify
• Good credit
• Enough money for closing costs and down payment
• An acceptable property to buy
The general requirements are explained in more detail below. Even if you don't fit the mold exactly, there may still be ways for you to buy a home. Guidelines are fairly general, and there really is a loan program for everyone.

Stable Income
Stable income means that you can prove you make enough money every year to qualify for the loan. If you are salaried, a lender will use your gross monthly salary to qualify you. If you are self-employed, commissioned, using bonuses or part-time income to qualify, the lender will average two years income to arrive at a stable number. Alimony and child support can be to used qualify, but you will probably have to prove that you actually receive the money regularly, not merely that you are entitled to it.

Lenders use debt to income ratios to determine qualification. Acceptable ratios change with the loan program. There are usually two ratios used:

• The "front" ratio: the total amount of the new principal, interest, taxes, insurance (PITI) should not exceed 25-35% of your gross monthly income, depending on the loan program. If you are buying a condo, co-op, or a house that has a homeowner's fee, you will have to add the monthly fee to your PITI to calculate this ratio.
• The "back" ratio: the total PITI plus all your monthly debts (including car loans, student loans, credit cards, alimony, child support, and other recurring monthly debts) should not exceed 33-41% of your gross monthly income, depending on the loan program.

Generally Accepted Ratios
Loan Program	Front Ratio	Back Ratio
Conventional Conforming	25-30%	35-38%
Conventional Jumbo	30-34%	36-40%
FHA Loans	28-35%	38-41%
VA	41%	41%

Tip: If you have a low to moderate income and are buying in a metropolitan area, check for City, County, and State bond programs. Many times, they offer below market interest rates, lower down payments and higher qualifying ratios.

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Good Credit Rating
Good credit means you have met all your financial obligations in a responsible manner. Credit reporting agencies report any payments you have made over 30 days late, any outstanding balances that you owe, and any judgments, liens, or bankruptcies that have been filed against you. If you have a few payments that are more than 30 days late on credit cards or student loans, the lender will require an explanation letter and will probably make the loan anyway. However, if you have more than a few late payments, or they were more than 30 days late, you will have to provide specific information about the circumstances surrounding the late payments.

Lenders will consider an explanation for a spell of bad credit. They want to see that the difficulties happened during a specific timeframe, that the borrower has a reason (divorce, loss of job, illness or other life change) and that good credit has been re-established.

Previous late mortgage payments and bankruptcies have specific rules about acceptability. Thus check with a lender who specializes in "less than perfect credit" loans, often called B and C mortgages.

Tip: First time buyer with no credit history? Create one from payments you have made on time that are not recorded by the credit bureaus. For example, car insurance payments, college payments, phone, cable and electrical bills and child care expenses. Provide the last 12 months cancelled checks or a letter from the person or company you are paying to verify that you made the payments on time.

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Financing
Monthly Payments
The monthly payment includes principal and interest on a mortgage, property taxes, homeowner's insurance and any condominium, co-op, or homeowners fees.

Cash Payments
You will need cash for a down payment, for closing costs, for prepaid expenses, and for reserves. The money has to be derived from a source acceptable to the lender. Generally, you are not allowed to borrow your down payment or closing costs, except when the loan is secured. For instance, you could borrow against a stock account, another house or a 401K (these are all assets for secured loans), but a credit card is not. (Credit cards are unsecured loans.)

The chart below provides ranges for these costs. However, your costs will change according to the loan program you choose and the locality in which you are purchasing. Don't despair if you don't have as much money as the chart indicates. Read How to Minimize Your Costs. Also, there is a loan program for every need and we are highlighting only the most popular.

Type of cost	FHA	VA (Veterans and spouses only)	Conventional conforming and jumbo
Minimum down payment	3-5% of the sales price	ZERO	5% of the sales price
Closing Costs- One time payment of costs to close the transaction	2-5% of sales price - depending on loan program and local closing costs	2-5% of sales price - depending on loan program and local closing costs	2-5% of sales price - depending on loan program and local closing costs
Prepaid Expenses- Amounts you have to prepay to others or have in an escrow account	Up to 12 months of property taxes, 14 months of property insurance and two months of PMI and one month of interest on the loan	Up to 12 months of property taxes, 14 months of property insurance and two months of PMI and one month of interest on the loan	Up to 12 months of property taxes, 14 months of property insurance and two months of PMI and one month of interest on the loan
Reserves- Amount the lender wants you to have after settlement in reserve. The lender doesn't actually collect the money, you just have to prove that you have it. Usually non-liquid assets can be used, such as a retirement account	2 months of PITI	2 months of PITI	2 months of PITI

Deeper Reading :
• Minimize the Cash You Need
• Acceptable Sources of Down Payment
• Fixed Rate or Adjustable Rate Mortgage?

Acceptable Purchase Property
Lenders are looking at the property as security for your loan. They expect you to repay the loan as agreed, but if you default, they will foreclose on the property and sell the house to make back their loss. For this reason, they appraise the property to determine what it is worth and to establish its condition. Most standard financing requires the property to be in "average" condition, as determined by the appraiser. That means some deferred maintenance is acceptable, but if the house is in poor enough condition to warrant a "below average" rating, a special financing program would probably be necessary. Some indications of potential problems include holes in the floors, walls, roofs, or ceilings, missing appliances, nonfunctioning bathrooms and obvious safety hazards. Other types of property that may fall outside standard guidelines are mobile homes, vacant land, and properties with acreage.

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Buyer's vs. Seller's Markets
Understand whether you are buying in a buyer's or seller's market.

A buyer's market is when there are more houses on the market than there are buyers, houses are selling very slowly, and sometimes the sales prices of houses are being lowered by sellers in an attempt to sell them more quickly.

A seller's market (also called a "hot" market) is indicated when there aren't enough houses for sale to meet buyer demand, houses are selling fast, and buyers are competing for houses by offering over the asking price (and driving the price up).

Tip: If you are in a seller's market - get a pre-approved mortgage. This is good strategy in any market, but if your offer has to compete with other offers, it gives you strength.

Research Local Real Estate
Start reading the real estate section of your local newspaper a couple of months before you buy. If you have not been reading the real estate section, go to the library and read the last few weeks. This will make you more familiar with the market.

If it's a buyer's market, you can be more leisurely in your search and negotiate price and terms. If it's a seller's market, you should be prepared to make a quick offer, expect to compete for the house, and probably have to pay close to or even slightly over list price.