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Answer: In general, lenders define a first-time home buyer as someone who
has not owned any real estate -- whether a personal residence, vacation home
or investment property -- during the past three years.
Lenders verify an applicant's status by examining their income tax
returns, checking to see that the individual did not take any deductions for
mortgage interest or property taxes.
Answer: Know what you can afford is the first rule of home buying, and that
depends on how much income and how much debt you have. In general, lenders don't
want borrowers to spend more than 28 percent of their gross income per month on
a mortgage payment or more than 36 percent on debts.
It pays to check with several lenders before you start searching for a home.
Most will be happy to roughly calculate what you can afford and prequalify you
for a loan.
The price you can afford to pay for a home will depend on six factors:
1. gross income
2. the amount of cash you have available for the down payment, closing costs
and cash reserves required by the lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current interest rates
Another number lenders use to evaluate how much you can afford is the housing
expense-to-income ratio. It is determined by calculating your projected monthly
housing expense, which consists of the principal and interest payment on your
new home loan, property taxes and hazard insurance (or PITI as it is known). If
you have to pay monthly homeowners association dues and/or private mortgage
insurance, this also will be added to your PITI.
This ratio should fall between 28 to 33 percent, although some lenders will
go higher under certain circumstances. Your total debt-to-income ratio should be
in the 34 to 38 percent range.
Answer: Increasing numbers of loan applicants are finding ways to buy their
own home despite past credit problems, a lack of a credit history or
debt-to-income ratios that fall outside of traditionally acceptable ranges.
Ask the lender for a full explanation, then appeal the decision in writing.
Answer: Most experts recommend that you should get pre-qualified for a loan
first. By being pre-qualified, you will know exactly how much house you can
afford. Almost all mortgage lenders now pre-qualify and pre-approve customers, and
many of them can even do it on the Internet. You also can do your own
affordability calculations; most recent consumer books on home buying include
steps to doing so, as do various real estate Internet sites.
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