There are three legs to determining your eligibility to borrow, and how much you will have to pay.
1. Your Credit Score (FICO score). These range from 450-850, with 850 being the highest/best credit score available. Generally, your score can not be lower than 620 to get a mortgage. FHA/HUD loans are usually used for those with lower scores. Further, FHA is a low down payment loan (as low as 3.5%). FHA loans will only go to a maximum loan amount $406,250. However, note that FHA mortgages carry with them an up-front mortgage insurance payment of 1.75% of the loan, plus 0.55% per year premium. If you pay off the loan within 5 years, you get part of the up-front payment returned.
2. Debt to income (DTI) is a ratio that measures your debt payments to your gross income. It is based on the minimum payment you need to make each month on each of your debts (including the new mortgage), divided by your monthly gross income. The lower, the better. If your DTI is higher than 50%, it will be very difficult, if not impossible, to get a mortgage.
3. Loan to Value (LTV) is the measure of how big your loan will be compared to the value of your home. The more down payment you make, the lower your LTV, which is good. It is very difficult today to get a loan of more than 80% of the value of the property.
Of course, there are many types of mortgages and sources of mortgages. As we know, the variable rate mortgages can be dangerous and this will be particularly the case in the coming years when the interest rates are bound to increase. Commercial banks, private banks and mortgage companies all provide products that may be suitable for your situation. Private bankers and mortgage brokers usually will be able to provide a broader range of options and products.
You should aware of prepayment penalties – i.e. you may be penalized if you want to sell or refinance the house within a certain period of time. Prepayment restriction is usually for 1 to 3 years, if there is one at all. there are two general types of prepayment restrictions. One is that you can sell the house without penalty, but cannot refinance it. The other is that you cannot sell or refinance it without penalty. The penalties are usually the equivalent of 6 months interest.
Finally, you want to be aware of the costs of borrowing/refinancing as these will be added into your loan. You should receive and review carefully the Good Faith Estimate provided by your mortgage broker and question any cost you do not understand. For more information, see MortgageMavin.com.