Home Financing Options with F&M Bank

Owning a piece of the “American Dream” by buying a new home can be one of the most satisfying things many of us can experience. However, it can be confusing given all of the various terms and types of financing options that are available.
Let’s look at a few of these items over the next few blogs and compare/contrast them to see which may be best for your particular situation.

First, how much home can you afford?
Seems like a simple question, but many variables enter into it from a lender’s perspective, including your family’s regular monthly income, current debts, credit worthiness and how much money you have available for a down payment. To provide you with a mortgage (i.e. loan) lenders typically use ratios of some of the above variables to make sure the loan can be paid back by the buyer without creating a financial hardship for them. So, what makes up these ratios?

DTI (debt-to-income) Ratio
The most often used ratio is the DTI (debt-to-income) ratio which is split into two parts; the Housing (front-end) ratio and the Total Debt to Income (back-end) ratio.

Housing ratio
The Housing ratio is the cost of your home related expenses such as the future loan payment’s principal plus interest (P&I), the home’s property taxes and insurance (PTI), and HOA fees (if any) divided by your monthly gross income. We like to see this ratio totaling 25% or less with few exceptions.

Total Debt-to-Income ratio
The total debt-to-income (DTI) ratio includes all of the costs in the housing ratio PLUS all other debts you pay monthly such as credit card bills, personal and auto loans and other recurring debts payments. Total debt-to-income ratios are typically higher, often 38%, because they take into account all of your monthly debt obligations. Ideally, however, we would like to see both of these ratios come in below 25% for the housing and 38% for total debt-to-income which indicates that you are a worthy candidate for a long term loan given that your credit score is good or better, and you have funds available for a down payment.

Standards may vary for housing and total debt-to-income ratios depending on the lender and the mortgage program you are interested in.

Keep in mind that since DTI ratios are based on your gross (not net) income and don’t take into account other normal and everyday expenses like food, health insurance, utilities, gas and entertainment, you will want to determine what your own comfort level is before you take the home loan plunge.

Use these ratios to determine the price of a house that you feel you can best afford and begin the initial search for your next home!

Next, we will cover pre-qualification steps. Need help now? Give us a shout. We’re here for you.

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published on 8/8/2019