When you’re interested in purchasing a home, the mortgage company or your fairbanks realtors will usually determine the amount you can afford by using one of two formulas.
The Payment to Income Ratio is a fairly simple formula. It adds your future mortgage payment, property taxes and insurance together to get what is called a “PITI” payment. Taxes usually mean there is an assessment of taxes on your property and sometimes depending on your area there might be a tax on the transaction itself. The insurance is usually two-fold.
Once of the insurances that happen if you are putting down less than 20% of the appraised value of the property is what’s called Private Mortgage Insurance or “PMI”. It is an insurance policy that the banks have you pay for in case you default on your loan. The second type is Homeowners Insurance and it is insuring the actual physical real property.
The PMI figure is what an original mortgage was created on, 20% down and the bank would loan the other 80%. Since today that is still considered “acceptable risk” by lenders, they will charge PMI anytime a down payment is under 20%.
I guess some things in Real Estate never change.
The Debt to Income Ratio is not as simple. It not only adds the PITI payment, but all monthly payments. This includes auto loans, credit card payments, investment payments, and other fixed monthly bills. The acceptable percentage using this method is usually higher than the standard 28 percent, but varies by lender.
The easiest way to figure out what you can afford is to figure out your Payment to Income Ratio using a monthly payment that produces a final percentage slightly under 28 percent of your income. Then using a loan amortization chart, which can be found from your REALTOR, you can identify the appropriate price range for your future home. Of course, the overall price range also is affected by the amount of your down payment, current interest rates, and the term of the loan.
Learn more about Fairbanks Realtors. Stop by Ray Brasier’s site where you can find out all about Fairbanks Realtors and what it can do for you.
