Predicting future trends in housing prices, interest rates and FNMA
rules for mortgages is very tough. A famous (Casey) Stengalism is
"Never make predictions, especially about the future." We also won't
make guesses about a CPA's earnings in Phoenix, as you're more
familiar with what colleagues are earning.
A lender looking at your situation will be applying a model dictated
by company and FNMA rules, looking at three items:
1. Credit scoring: being 25 may work against you if there are only two
or three years of credit history. Still, you'll score well enough for
a loan. However, the most-attractive products -- low-interest
adjustable rate mortgages or ARMs (now in the 5.25% to 5.5% range) may
be out of your reach. Still, a 7% mortgage on a $110,000 house would
have monthly payments (principal and interest only -- no property
taxes or other) of about $730.
The Fair Isaac & Co. (FICO) credit scoring system is widely accepted.
The Federal Trade Commission has an interesting presentation with some
measurements used in credit scoring in "Credit Scoring 101"
http://www.ftc.gov/bcp/creditscoring/index.htm
2. The percent of debt payments each month to take-home pay. Your
salary probably gives you about $2,070 per month after taxes, social
security and health care. Debt payments will include car, credit
card, school loans -- and the new mortgage, with property taxes and
homeowners association fees. Interest.com has several tools at their
site, including "How Much House can You Afford?" Their principal &
interest (28%) and total debt ratios are safe assumptions for most
lenders (36%), though this is one reason to talk to lenders directly:
http://www.interest.com/hugh/calc/mort_links.html
Note that an increase of about $15,000 per year in your income makes a
house that's 70% more expensive affordable with this model.
The mortgage calculation will take P&I of $730 and add at least
$145-$170/month for taxes and insurance. Mortgage companies often
want 15 months in escrow payments at the end of the first year to plan
for inflation in property taxes and insurance, thus the higher number.
Add monthly payments for car, credit card and school loans to that
amount. Your lender will undoubtedly accrue 1-1.5% per month for
credit card balances, even if interest-free for the next 12 months.
Conversely, if the car loan has less than 6 months left on it, they
may ignore it.
Lenders like to see a total debt ratio below 40% so that homeowners
can afford to pay those repair and upkeep bills. Newer homes will
have little in maintenance expense, but substantial decorating
expense. Older homes have repair and rehab expenses, sometimes
occurring unexpectedly and in large sums. A house inspection can help
prepare you for those repair items by estimating the life of roof,
furnace and other key components:
http://www.inspecthomes.org/buyerfaq.htm
3. Percent equity: any loan with less than 10% equity or $11,000 to
$12,000 will be a higher risk category. Remember too that the
purchase will have to fund closing costs, which will probably be a
minimum of $2,500 and may be closer to $5,000. Because of this, you
may get loan approval "subject to appraisal" or pay more points.
And, the bank would like to see you left with some money in savings
accounts to pay unforeseen expenses.
There's no doubt that a mortgage and property taxes will reduce your
taxes enough save about $200 per month, but two things are working
against you: lack of liquid assets in savings/stocks and debt level.
Other factors working against you will be time at your current job and
years at your current home address under the FICO scoring system.
Here are some strong reasons to wait:
· accumulate income in IRA or 401(k) accounts tax-free. Don't forget
that whole life policies are also accumulating value.
· higher income. There are no assumptions for income growth in any of
the credit systems.
· pay down consumer debts for car and credit cards to lower the
monthly debt load.
· longer work and professional history. As part of the credit
scoring, you'll be asked by lenders not just how long you've been at
your current job but how long you've been in the profession.
· higher credit scores will allow use of ARM-type mortgages. Even if
interest rates move higher, this would offset some or all of the rate
hikes.
· accumulate savings in highly liquid accounts, including
savings/checking, mutual funds, stocks or bonds.
. you may find attractive job opportunities that require a move.
A second income in the family can also drastically alter the
affordability of a mortgage.
Mortgage lending has become a much more open and easy process over the
past 20 years. Your bank's lending officer would be glad to take
these same numbers that you've provided and advise you on what would
make you a sterling candidate in 2004.
On-line you can go through the mortgage application process with
companies such as lendingtree.com and see what types of responses come
back.
And using Google also provides a host of information by combining a
variety of search terms, such as:
mortgages + "credit scoring"
mortgages + FICO
Buying a home is one of the most exciting things any of us do.
Hopefuly these planning tools give you an idea what a great
opportunity you have ahead. In any case, let us know if there's any
other information that can help!
Best regards,
Omnivorous-GA |
