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Consider Co-borrowing
Both co-signers and co-borrowers are other individuals whose income,
debt, and credit are factored into the calculation when determining the loan
amount you qualify for. Including a co-signer on the loan can significantly
increase the loan size that a borrower qualifies for; for more information on
co-borrowing, see page 69.
How much will you put down?
Just how much of a down payment should you plan to put down? With a
smaller down payment, your initial cash outlay will be less, but your monthly
payment will consequently be higher. Also, many lenders will require you to
purchase private mortgage insurance (PMI), which protects them from loss in
case you default on your payments. PMI usually costs between .5%-1% of the
loan value on an annual basis, so a $200,000 loan might incur an additional
annual PMI cost of $1,000-$2,000, or up to about $166 extra a month. This
expense has the additional disadvantage of increasing the debt factored into
the DTI determination, which could result in a rejection of the application.
The “magic number” for down payments that most people are familiar with is
20%. 20% is ideal for a number of reasons:
• Mortgage lenders view the transaction as lower risk, thus allowing you to qualify
for the best possible mortgage rate based on your income and credit history.
• Your monthly payment will be lower if your total loan amount is smaller.
• Lenders will not require the added expense of mortgage insurance, which
protects the lender if you default on the loan.
For some, who are sure they can afford the costs of home ownership but
don’t qualify for a conventional loan, FHA loans, secured by the Federal Housing
Administration, can be a viable alternative. However, because of the very
high insurance costs associated with these loans, they are generally only recommended
for buyers with no other options. Learn more about FHA loans on
page 68.
Once you have determined how much you are prepared to spend on a house,
you are prepared to embark on the house hunt.
52 | 2017 Lakewood Home Buyer’s Guide