Financing for Home Buyers


How Much Can You Afford?

We think a good rule of thumb is that your total payment for mortgage, taxes, insurance and assessments, should not exceed 28–33% of your gross monthly income.

The amount of mortgage payment you can afford may be limited by your monthly payments on other long-term debts (those that will take more than 10 to 12 months to pay off).

The total of your monthly payments on long-term debts plus your proposed mortgage payments should not be more than 36–40% of your gross monthly income.

Use the worksheet shown here (click for a printable PDF version) to determine how much home you can afford. Start with a purchase price equal to approximately 2-1/2 to 4 times your gross annual salary.

If the Total Monthly Mortgage Payment is more than line E, you should select a smaller loan amount. Recalculate until Total Monthly Mortgage Payment is less than line E.

Documents You Need

You’ll need to provide the following information about each borrower, including:

  • Social Security Number
  • Two years of W2s and one month of pay stubs (if you are salaried)
  • Two years of tax returns and a year-to-date profit and loss statement (if you are self-employed)
  • Three months of bank statements for each bank, mutual fund and/or investment account
  • A current statement from your stock, retirement and/or 401K statement
  • If you own rental property, provide two years of tax returns and current rental agreements
  • A copy of your divorce decree, if applicable
  • If you are not a citizen, provide a copy of the front and back of your green card
  • A current driver’s license, state ID card or passport

Types of Mortgages

There are a variety of mortgages to meet everyone’s needs. These summaries will help you narrow your search.

Adjustable Rate Mortgage
A mortgage that allows the lender to adjust the mortgage’s interest rate periodically on the basis of changes in a specified index. Interest rates may move up or down as market conditions change. The change in interest rate will result in a change in the periodic payments due under the mortgage. ARMs are attractive when short-term interest rates are trending lower.
Balloon Mortgage
Usually a short-term fixed-rate loan that involves small payments for a certain period of time with the balance due in a single, large payment at a time specified in the contract. When the balloon mortgage comes due, the entire balance must be paid. Generally, the homeowner must either refinance or sell the property.
Buy-Down
The payment of extra money on a loan now so as to provide a lower interest rate over either a given period or over the life of the loan. To buy down a mortgage, the buyer pays additional points to the lender, which will decrease the interest rate for a specific period.
Conforming Loan
Conventional home mortgages, first mortgages up to loan amounts mandated by Congressional directive, which meets the qualifications for sale or delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).
Construction Loan
A structured, short-term loan to provide funds necessary to begin construction on buildings or homes.
Conventional Mortgage
A mortgage loan made by an institutional lender without the inclusion of government guarantees such as VA or FHA loans.
Convertible ARM
The convertible ARM is a combination of both fixed-rate and adjustable rate mortgages, allowing the best of both options in one package.
Deferred Interest Mortgage
A mortgage in which the payment is not sufficient to cover the principal and the interest and the payment portion of the interest is postponed until a certain date at which time the interest postponed is added to the principal owing.
Federal Home Loan Mortgage Corporation (FHLMC)
The Federal National Mortgage Association, which is a congressionally chartered, shareholder-owned company that is the largest national supplier of home mortgage funds. It is commonly known as Freddie Mac. The company buys mortgages from lending institutions, pools them with other loans, and sells shares to investors. Detailed information may be found at http://www.freddiemac.com.
Federal Housing Administration (FHA)
An agency of the federal government, the Division of the Department of Housing and Urban Development, both sets standards for the underwriting of private mortgages and insures residential mortgages made by private lenders.
Federal Housing Administration (FHA) Loans
Low-rate loans available to Americans with smaller incomes who are interested in modestly priced homes. Down payment requirements are usually lower than the prevailing ones.
Federal National Mortgage Association (FNMA)
The largest supplier of mortgages to home buyers and owners, a corporation established by Congress and owned by stockholders. Commonly referred to as ‘Fannie Mae,’ this federally chartered agency buys mortgages from lending institutions, pools them with other loans, and sells shares to investors. Detailed information may be found at http://www.fanniemae.com
Fixed-Rate Mortgage
The interest rate you pay and the monthly principal and interest payments are agreed upon from the outset and will not change throughout the entire term of the mortgage.
Government National Mortgage Association (GNMA)
A government-owned corporation within the U.S. Department of Housing and Urban Development, it is also referred to as ‘Ginnie Mae’. This government agency guarantees the payment of principal and interest on all of its pass-through securities, and its guarantee is backed in turn by the full faith and credit of the U.S. Government.
Graduated Payment Mortgage (GPM)
A mortgage that usually starts the borrower with low payments that are gradually increased over five to ten years, before leveling off for the remainder of the term of the loan until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage. Usually government insured loans (VA or FHA).
Growing Equity Mortgage (GEM)
This is a long-term mortgage whereby the borrower agrees to increase his payment each year by an agreed amount. The added money per payment is applied directly to the outstanding principal on the mortgage. The mortgage thereby is paid off in a shorter number of years.
Renegotiable Rate Mortgage (RRM)
Similar to an Adjustable Rate Mortgage, this type of mortgage allows the interest rates and payments to be adjusted periodically according to an index.
Reverse Annuity Mortgage (RAM)
A type of mortgage in which the property’s equity serves as security for periodic payments made by the lender to the borrower. Mortgage is generally paid out upon the sale of the property.
Rollover Mortgage (ROM)
A mortgage where the payments are only guaranteed for three, four, or five years. The borrower is allowed to refinance at the end of the term at the interest rate then applicable.
Shared Appreciation Mortgage (SAM)
It is a loan arrangement where two or more parties participate in the purchase of real estate and share the appreciation and tax deduction. Similar to shared equity mortgages.
Veterans’ Administration Loans
Mortgage loans to veterans by banks, savings and loans, or other lenders that are guaranteed by the Veterans’ Administration, enabling veterans to buy a residence with little or no money down.
Wraparound Mortgage
A secondary financing option in which a new larger mortgage is created to encompass the first mortgage. This large second mortgage is used to preserve the low interest rate on the first mortgage for a potential buyer.