Your First Step: calculate
how much house you can afford using the simple
calculators below.
This will help determine what type of home to
buy and where to look.
Please note that these calculations do not consider
the true cost of a mortgage, which includes
additional monthly costs for escrow and other
related fees. See our notes for escrow information
Monthly Payment Calculator
estimates
the monthly payment on the amount borrowed
Monthly Affordability Calculator
estimates
how much you can borrow on a budgeted
monthly payment plan.
Analyze the Home Buying Numbers:
What Goes Into the Numbers
1: You Will Need a Down Payment
Mortgage lenders expect home buyers to use
a portion of their own money to purchase a
home. The standard down payment percentage
is 20% of the home's purchase price.
Many lenders now allow for lesser percentages
as little as 3-5%, provided that private
mortgage insurance (PMI) is obtained: see PMI notes.
(we have detailed information about zero-down
mortgage loans at our affiliated site: www.PickmyMortgage.com)
Existing homeowners can use the resale equity
of their home as down payment. New home buyers
will need to use their savings or cash gifts
from family members.
Note: IRS rules allow for
an one-time distribution from qualified
IRA accounts without the 10% penalty for acquisition
of a home for first-time home buyers.
Question:
Can I withdraw funds penalty free from my
401(k) plan to purchase my first home?
Answer:
If you are less than 59 1/2 years of age,
you cannot withdraw funds from your 401(k)
plan to purchase your first home without being
subject to a 10 percent additional tax on
early distributions from qualified retirement
plans.
However, depending on the rules for your 401(k),
you may be able to borrow money from your
401(k) to purchase your first home. Your plan
administrator should have written information
about your particular plan that explains when
you can borrow funds from your 401(k) as well
as other plan rules.
Question:
If I can't withdraw funds penalty free from
my 401(k) plan to purchase my first home,
can I roll it over into an IRA and then withdraw
that money to use as my down payment?
Answer:
Yes, if you are receiving a distribution from
a 401(k) that is eligible to roll over into
a IRA and you meet all of the qualifications
for an IRA distribution for a first-time home
buyer. Your plan administrator is required
to notify you before making a distribution
from your 401(k) plan whether that distribution
is eligible to be rolled over into an IRA.
To see if you qualify for a distribution to
be used as a first-time home buyer, refer
to Publication 590, Individual Retirement
Arrangements (IRAs) (Including Roth IRAs and
Education IRAs).
2: You May Need to Pay Discount
Points
Discount points are up front fees that lenders
charge in order to offer you a lower interest
rate on your mortgage.
A point equals 1 percent of the mortgage loan
amount. For example, if the lender charges
2 points on an agreed loan amount of $100,000,
your point fees will be $2,000.
Many lenders offer mortgage loans with zero
points. These products generally carry higher
interest rates.
Typically, each point that you pay on a 30-year
loan lowers your interest rate by 0.125 of
a percentage point. This reduction may vary
by lender.
Compare rates vs. points calculation —
from Dinkytown.net: www.dinkytown.net
3: Don't Forget About Closing
costs:
Closing costs are incurred costs associated
with the closing and transferring home ownership
from the seller to the buyer.
Closing costs can average about 2-5% of
the total sales cost. That does not include
points.
Estimate how much you will have
for a down payment:*
Analyze the Home Buying Numbers:
Tax Benefits of Home Ownership
In most cases, you can
deduct the mortgage interest portion of your
house payment from your taxes,
that is if you itemize your deductions on Schedule
A (Form 1040). The following calculation shows the estimated
"Effective Interest Rates" for each
income tax bracket.
You may want to pre-approve
your mortgage loan before house hunting.
You will be able to make an offer knowing exactly
how much you can afford. Also, if the seller
knows that you have been pre-approved for a
mortgage loan, your offer will be more attractive
if the seller wants to sell fast.
There is no obligation
when you pre-approve for a mortgage loan from
a lender.
Nor does it obligate the lender to provide you
a mortgage loan.
The pre-approval simply reviews your credit
and income qualifications based upon the information
supplied. The final approval will require verification
of your financial status and home purchase
With a pre-approved mortgage,
you can get most of the paper work completed
so that you can close on your home as soon as
possible.
Lenders typically use two key criteria in qualifying
you for credit:
1: Your Capacity to Repay
the Mortgage Loan
your capacity to repay your loan is analyzed
by two lending ratios:
i: The "housing
ratio": calculated by dividing
monthly housing expenses by your gross monthly
income. As a basic rule, the housing ratio
should not exceed 28%.
ii: The "debt-to-income
ratio": calculated by dividing
your fixed monthly expenses by your gross
monthly income. As a basic rule, the debt
ratio should not exceed 36%.
your outstanding credit report lists any payment
delinquencies that you may have had over the
past three years.
The report can be a factor in a lending institution's
decision to approve or decline your mortgage
application. You should review your credit report
for any errors before applying for a mortgage.
Allow yourself about 2-3 months prior to the
loan application for correcting of any errors
that may be on your report.
You have the right under Federal Law to know
what is in your credit report.
We invite you to visit our
Credit/Debt Management Center for complete information
about: