Saturday, November 2, 2013

Home Financing

If you want to own a home but do not have enough money to finance the construction from start to finish, you have the home financing institutions to help you. However, borrowing money from banks, lending companies and even through government program has some risks. This is not to say though that you have to keep away from it. What you should do is know carefully the critical questions to ask when taking such loan. This way, you will be able to wisely choose which type of loan to take.The very first question you should ask yourself when applying for a home loan is: how much can you afford? Usually, most people have a budget on their mind and a set design for a home. This is not bad at all. In fact, it is good to already have a set budget and design. The only problem is, the figure you have in mind may not be similar with the figures offered to you by home financing companies.Knowing how much you can afford.Most lenders uses payment-to-income ratio and debt-to-income ratio as one way to know how much a borrower can afford. The payment-to-income ratio should not exceed to 28% and the debt-to-income ratio should not exceed to 36%. Meaning, for every $1,000 you earn for a month, your maximum allowable monthly payment is $280 and your total monthly debt should not exceed $360. There are other factors the bank looks into to determine how much you can afford such as credit record and savings. The rule of the thumb is, if the borrower has a good credit record, a reasonable savings, and good permanent source of income, he or she can borrow larger amount of money.The second question you should be able to answer is: How much will your monthly payment be?Your monthly payment will depend on the down payment you give, the total amount of money you borrow, the length of the loan, and the (type of) interest rate. But again, your monthly payment should not exceed to 28% of your monthly income.The third question is: Are there ways to reduce monthly payments?A good credit rating is enough proof that you are not a financial risk to the bank. This is why most banks favor good credit record holders and give them better, lower rate, which is equivalent to lower monthly payment.Another good way to reduce monthly payment is to pay the highest amount you can afford on down payment. This is because the lower you debt is, the lower interest and monthly payment you have to pay.If you can your lender to lower the interest rate, you can also reduce your monthly payment.And finally, what should I do to increase my loan?Lenders base their computation of the amount money they can lend you mainly on payment-to-income ratio. So a good way to increase the amount of your loan is to have a higher monthly income. You can also negotiate with your lender the amount of money you want to borrow.More on home financing:What is the difference between pre-qualified and pre-approved?Pre-qualification is similar to using online loan calculator. The lender will tell you how much money you can borrow based on how much money you earn, how much money you have for the down payment, and how much debt you already have.Pre-approval involves an actual process of application. You will be asked to submit pay stubs, tax returns and other information for verification. The lender with also check your credit. Once your application goes well, you are in line to make a loan.In the actual setting, brokers as well as the real estate market favors those who are pre-approved since the application loan has already been processed and approved.Is it okay to borrow too much money?Most people borrow money more that they should because of the belief that their income will increase soon. Lenders on the other hand allow this believing that the borrower will forego buying new clothes, vacation trips, retirement savings, etc. While both have agreed to receive and lend too much money based on individual assumptions, you should never borrow money you do not need.