I am a first time home buyer (actually condo) and I have questions
about my pre-approval.  If there is a combined income of 75,000
annually and debt pay off of $1000 monthly(cars, student loans etc.),
and no additional assets (except for 5,000 saved for down payment).
What would be our ball park approval?  Is there a formula I can use to
determine what I need to get a specific approval? i.e to get a 200,000
approval you would need x amount in liquid assets with the debt to
income ration we have. The representgative told us that just to get an
approval we would have to be receiving a gift of 15,000.  This doesn't
seem right to me.  I was under the impressionthat you could, in
theory, just have a down payment of 3% (as a first
time buyer) and throw everything else into the mortgage.  He also gave
us a rate of 6.895%!  I guess I'm looking for a seasoned real estate
person to tell me if everything here is "kosher" or if I should move
on from this offer.  Any info in laymen's terms would be very useful!!

Greetings Julie99:

Oooh, my first advice to you is to lower your sights a bit on purchase
price.  Believe me, you *don't* want to be chained to a home.

I have a few questions:

Is $75,000 your combined *gross* income?  Check last year's tax return
and see how much money you kept as your own after Uncle Sam dipped in.

Have you signed an exclusive with the agent?  An exclusive is a
document stating that from XX date to XX date, you agree to work only
with said agent.  Most agents slip it in when a first offer is made
for a property.  If you have, you are bound to that agent for the
duration of the exclusive.

Have you done this:

Add 
  1/12 total yearly insurances (car, life, health, home)
  1/12 real estate taxes
  the $1,000 you mentioned above
  10% for a retirement/college fund(s) 
  monthly credit card payments
  monthly utilities estimations (find out what that condo costs to
heat and cool, the utilities companies have the info)
  monthly food costs (including restaurants)
  monthly clothing allowance
  the house payment of your choice below

The total will be your monthly payout.  Of course, that list above
doesn't include trips to the theater, movies, vacations, unexpected
vehicle breakdown, unexpected illness, etc.

Look at how much money is coming in monthly and how much money is
going out monthly.  There's an old saying that your rent should equal
one week's income.  If you are going to be paying more than that, then
I suggest you adjust your price sights.

Currently, if you got the $195,000 (+ $5,000 DP) loan, you would also
have to add closing costs of at least $2,500 to $3,500 rolled back
into your loan, unless you have that cash saved in addition to the
down payment.  You should not have to pay over 1 origination point
($1,950) and no points to secure the interest.  With a loan that high,
there should be no interest points, at least not with the current
market the way it is.

10 yr. loan - $195,000 @ 6.85% = Your Monthly Payment will be: $2,249
Total interest paid on life of loan = $ 74,888  
 
15 yr.      - same             = Your Monthly Payment will be: $1,736
Total interest paid on life of loan = $ 117,552 

30 yr.      - same              = Your Monthly Payment will be: $1,277
Total Interest Paid over Life of Loan: $ 264,991 

6.895 is high for the amount of money you are borrowing.  A friend of
mine recently borrowed @ 5.75 on a $50,000 first-time home loan.  She
was told that the interest rates went lower as the home price went
higher.  So your quote seems rather high.  You should be able to get
to 5.25, if not lower.

If you found a comparable condo for $ 145,000 (+ $ 5,000 - same
interest rate above):

10 yr.               Your Monthly Payment will be: $1,672  
Total Interest Paid over Life of Loan: $55,686 


15 yr                Your Monthly Payment will be: $1,291  
Total Interest Paid over Life of Loan: $87,410  


30 yr.               Your Monthly Payment will be: $950  
Total Interest Paid over Life of Loan: $197,045

You can play with the loan amount and interest very easily at Yahoo's
Amortization Calculator at
http://list.realestate.yahoo.com/realestate/calculators/amortization.html

I hope you are not even considering a 30 yr. loan as you see the
incredible difference in interest rip-off.  15 years should be the
longest time for your loan.

********************

To qualify for a first-time buyers loan, I believe the property you
buy must meet FHA standards.  This is important for down the road when
you want to resell.  If it's not FHA approved property, then it won't
qualify for another first-time buyer.

In this shaky market, bank and lending institutions do not want to
take big risks.  If you had $20,000 for a down payment, you'd have
better bargaining power for the loan amount.  My friend had a 12% down
payment and very little income but she negotiated successfully. 
Having a larger down payment shows the lender that you are serious
about keeping up your end of the bargain.  Also, - also, her credit
rating was extremely high.  She had no other debt: No credit card, no
car payment.  Lenders look very closely at the debt to income ratio.

USNews has a debt-to-income calculator at
http://www.usnews.com/usnews/biztech/tools/modebtratio.htm - fill in
the fields to get an idea of your percentile.

Debt to Income Ratio explained (with formulas)
http://homebuying.about.com/library/weekly/aa030102a.htm

Another debt to income calculator from IBM
http://www.ibmtefcu.org/calcs/debtcalc/debtcalc.htm

"Need to know how much income you need to buy a particular house?
Enter the values below, and we'll tell you."
http://www.interest.com/calculators/earn-home.shtml 


You can probably find a bank or mortgage company that has a better
rate than what is being presented to you and I would urge you to shop
around for a better interest rate.  Interest rates are the lowest in
decades and banks want your interest but they want to be assured of
your payments in accord with your income.

Should you need clarification of any of the information or links I
have Provided, please request it and I will be happy to respond.


SEARCH STRATEGY:

how much income to buy a house?
amortization calculator
"debt to income ratio"

---

Clarification of Answer by journalist-ga on 25 Apr 2003 00:05 PDT

Denco makes an excellent point.  You must acquire a loan that has no
prepayment or payoff penalties.

Howdy julie99!

Good information by journalist there, but also make sure there
is no prepayment penalty in your loan, as you will want to make
additional payments towards the principal (and make sure the
lender knows it is going towards the principal) as this will
save you lots of money in interest.  You might get a gift, etc.
that you will want to apply (do it if you can afford it) to
prepaying the principal as well, and you do not want there to
be a penalty for doing so.

Looking Forward, denco-ga

Typical prepayment penalties do not penalize for making overpayments
on a loan. Prepayment penalties are for when a loan is paid off or
refinanced before the prepayment penalty expires.

Most mortgage contracts that have prepayment penalties impose the
penalty when more than 20% of the balance is paid within one calendar
year, and only charge the penalty on the portion of the payment that
reduces the principle by more than 20%. For example, if you have a
$100,000 mortgage, and pay within the first year you pay the balance
down to $79,000, you would pay a prepayment penalty on $1,000.

A typical prepayment penalty would be six months interest. In the
above example, if the loan were at 7%, six months interest on that
$1000 at 7% would be $35.

On a 30 year amortization schedule, $100,000 at 7% for 30 years would
have a monthly principle and interest payment of $665.68. To hit that
penalty, one would have to increase those payments to $2,314.88 per
month, so you can see that it would require a substantial overpayment
before a prepayment penalty became a concern. In this scenario, one
would have to more than triple their expected monthly payment before
they were penalized.