GOLDILOCKS FINANCING How To Get A Just Right Loan You Can Really Live With

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If you're thinking about buying a home soon, today's market offers many attractive opportunities—and a few hurdles. On the plus side, you're likely to find a good selection of homes to choose from, affordable interest rates and attractive home prices (in many areas). If you're working with a good real estate agent, you'll be able to negotiate flexible terms with sellers—inspections, move-in dates, conveyances, allowances, etc. You'll also find a wide range of mortgage options (you may be surprised, if you call us!).The hurdles today? Making sure you get a "Goldilocks" mortgage loan—not too much, not too little, just right—means getting the mortgage you want and being able to afford the mortgage you qualify for, today and into the future. Even though lending standards are tighter than during the housing boom, requiring borrowers to have higher credit scores, larger down payments and less debt, qualifying for a mortgage amount doesn't necessarily mean a homebuyer can afford it. That's because your mortgage payment—and other housing costs—make up only part of your many personal spending habits and priorities. Put simply, lender standards and a real-world budget combine to shape today's ideal "Goldilocks" financing. Lender Standards Lenders use a variety of measurements to minimize their investment risk in financing your home. They look at: Credit scores—which reflect how much money you owe other creditors, how well you've made payments on your debts and other obligations, along with other financial behaviors. Current monthly debt—how much you owe and to whom, and how much money you're already approved to borrow for your new home purchase. Income—including amount and type (e.g., salaries, commissions, self-employment, dividends, etc.). Assets—how much money you have in savings, investments, insurance policies, retirement funds, etc. (basically, your "safety net"). Weighing all these factors together, lenders determine how much money they are willing to put at risk on your home purchase and what interest rate they will charge to cover their risk. To determine the loan amount, they usually apply two types of debt-to-income ratios. Income ratios. The "front-end ratio" allows a maximum percentage of monthly housing costs—mortgage payment, taxes and insurance—to income of, say, 28%. The "back-end ratio" is larger, say 36%, for total monthly long-term debt and housing costs. (These ratios are just examples; ratios vary by lender and loan program.) Although debt-to-income ratios and underwriting standards are structured to minimize the possibility you might spend more than you can afford on your home purchase, the ultimate responsibility for making that determination lies with you, the borrower. Your call. Maybe you have children who will be in college in the next few years—no small bill, there. Perhaps you or a family member has a health issue that generates regular and costly medical bills your insurance doesn't cover. Do you have financial responsibility for a relative's needs? Do you enjoy expensive hobbies and activities you're just not willing to give up? Are you planning to buy a home that needs extensive renovations or repairs? Real-World Budget There are any number of personal financial considerations you may have—now and in the future—that will not be factored into the lender's decision-making process. That's why it is so critically important you construct a realistic budget—focusing closely on your particular spending habits and obligations—before you commit to a mortgage. You may find you can really comfortably afford to spend only 26% or 22% of your income on housing costs. And that's fine — better to buy a less-expensive home you can afford than risk getting over your head in debt, possibly losing your home to foreclosure and seriously damaging your credit. Financial plan. The information you submit for a loan application comprises some of what you need to build a spending and savings plan for your home purchase. Beyond that, you'll need to review your spending habits over the past six to 12 months. (Your check register and credit-card statements can help provide some of this information.) For bills you pay quarterly, every six months or annually, determine the per-month amount. As you build your spending and savings plan, be sure to factor in expenses you'll have in the foreseeable future, especially major ones like college tuition. And make sure to plan savings contributions to an adequate emergency fund. Remember, you're looking for the maximum monthly housing payment you can afford. Once you've completed this budgeting exercise, you'll know how much is left for a monthly mortgage payment, taxes, insurance, maintenance, repairs and homeowners association or condo fees. Contact us. Be sure to call us if you have any questions or need further information to complete your budgeting process. And, of course, we can tell you what price home your affordable "Goldilocks" monthly payment and down payment can buy in today's market! 910-202-3607 or bakerwayneassociates@ec.rr.com