In fact, this is true for anyone buying a home, and with any type of mortgage loan. The sooner you can start preparing, the better. Why? Because many of the steps I’m about to explain take time to complete. It takes time to save up for a down payment, to make corrections to a credit report, and to improve a credit score. So there’s no better time like the present.

Getting an FHA Loan in 2010

So what does it take to get an FHA home loan these days? What should you be doing now to increase your chances for success next year? Here’s your checklist for securing a 2010 FHA loan.

1. Start saving money. The more money you can save between now and the day you apply for an FHA loan, the better off you’ll be. You need cash reserves for two reasons. First of all, you will need to make a down payment of at least 3.5% when using FHA home loans. Secondly, you’ll need cash to cover your closing cost. And then there’s all of those moving expenses!
2. Get copies of your credit reports. You can get all three of your reports for free, once a year, by visiting AnnualCreditReport.com. This website is maintained by all three of the reporting bureaus (Experian, Equifax and TransUnion). And it’s the only website regulated by the federal government. Skip the scams and go straight to the source by using this website!
3. Correct errors on your credit reports. According to a study I once read, the vast majority of consumer credit reports have errors on them. These can range in scale from harmless typos to negative account info that’s not really yours. Serious errors can lower your credit score and hurt your chances for getting an FHA loan in 2010, so correct them early. Visit the website of the company that produced the erroneous report, and look for the “Disputes” section.
4. Check your FICO credit score. This is different from the reports we just talked about. Your FICO score is a number between 300 and 850, and it’s based on the information contained within your credit reports. A higher number is better. With a high score, you’ll have a much better chance of getting approved for a FHA home loan in 2010. You’ll also qualify for a better interest rate.
5. Determine your budget. Many first-time home buyers start applying for mortgage loans before they have a monthly home-buying budget established. This is both backward and dangerous. Why? Because it’s possible to get approved for an FHA loan that’s too big for you. Let’s call it a dirty little “secret” of the mortgage industry. Why do you think there were so many foreclosures over the last couple of years? Determine how much you can afford to spend each month toward a mortgage, and do it before you start applying for FHA home loans.
6. Use ARM loans with caution. An adjustable-rate mortgage (ARM) loan has an interest rate that will adjust or “reset” every few years. This can lead to a higher interest rate, and in some cases can increase the size of your mortgage payment significantly. This is another factor that fueled the housing crisis of 2008 - 2009. If you plan to stay in the home for more than 3 - 5 years, do yourself a favor and choose a fixed-rate mortgage loan. Avoid the ARM altogether.
7. Use FHA-approved lenders. The Federal Housing Administration does not make loans directly to the public. Instead, they insure the loans made by regular lenders in the private sector. So in order to apply for an FHA loan in 2010, you will need to go through an FHA-approved lender. You can find them through the Federal Housing Administration website, or by going here:

This article gives you a road map to success, but your research does not end here. You should continue to learn everything you can about FHA home loans between now and 2010, if you are serious about applying for one. I recommend starting with the frequently asked questions on the Federal Housing Administration’s website. It offers a wealth of information about these loans, how to qualify, and how to find a lender.

I hope this article put you on the road to success for buying a home next year, and I wish you all the best. Good luck.

In this article, I’d like to focus on FHA home loan down payments, because that’s what most first-time buyers want to know about (judging by the emails we receive). How much money do you have to put down on an FHA loan when buying a home? Is there any kind of down payment assistance when using the FHA program? These are both common questions among buyers, so let’s address each one of them in turn.

Smaller Down Payment on FHA Home Loans

Without question, the biggest benefit of using an FHA loan is the fact that you can put less money down on the purchase. For a regular mortgage loan — i.e., one that is not insured by the Federal Housing Administration — you would probably have to put down 10% or more. But the down payment on an FHA home loan can be as low as 3.5% of the loan amount. This is obviously something that appeals to first-time home buyers, in particular, because they do not have any equity to put toward the down payment on a future purchase.

Down Payment Assistance With Tax Credits

A fairly new development in the realm of FHA home loans is the $8,000 tax credit for first-time home buyers. This stimulus program has gone through quite an evolution over the last few months. It started as a $7,500 tax credit that had to be paid back over time (more like an interest-free loan than a true credit). Later, the amount was increased to $8,000 and the repayment requirement was removed. This made it even more popular among home buyers.

The most recent development for the tax credit is that it can now be used as a down payment on FHA home loans, in cases where the down payment exceeds 3.5% of the loan amount. There has been some confusion about this, as you might imagine. Many first-time buyers are under the false impression that the tax credit can be used to cover the entire down payment on an FHA loan, but this is not true. The buyer will still have to bring 3.5% to the table in the form of a down payment, and the tax credit can be used to cover any amount that exceeds the 3.5%.

Getting FHA Mortgage Quotes Online

We receive a lot of emails from people who have done their homework and are ready to take the next step and actually apply for an FHA loan. But they don’t know where to go or what to do in order to get the ball rolling. The good news is, you can apply for an FHA home loan online, which can save you a lot of time and energy.

Remember, when you apply for these loans, you do it through a regular lender — not through the FHA itself. You have to use a mortgage lender who has been approved by the Federal Housing Administration to participate in the FHA program, and you have to meet certain guidelines established by that agency. But the initial approval for down payment, credit score, mortgage amount and other loan details will come from the actual lender.

You can find a list of FHA-approved mortgage lenders on the Federal Housing Administration website. But it can be time-consuming to apply for FHA loans through so many different lenders. So my advice is to apply through a network of lenders. You can get started with that by using the link provided at the top of this page.

Conclusion and Summary

Now that you are educated about FHA loan down payments, program requirements, and other details of these loans, you’re in a much better position to move forward and actually apply for one. I hope this article has answered your questions regarding down payments on FHA mortgages, and I wish you all the best in your home buying process.

First of all, you need to bear in mind that everything I’m about to say is generalized. Some people simply don’t qualify for FHA refinance programs, and for a variety of reasons. Additionally, each mortgage lender has its own way of reviewing loan applications, assigning interest rates, etc. So nothing with regard to FHA mortgage refinance is set in stone. With that disclaimer out of the way, let’s talk about how you might lower your interest rate with an FHA home loan.

FHA Mortgage Refinance Defined

Let’s start with a definition of this particular refinancing program and how it works. Through this process, you are basically replacing your current home loan with a new one. You finance the home when you first buy it, and you refinance it the second time around. When you do this using an FHA mortgage loan, there are certain aspects that make the process unique.

The Federal Housing Administration (FHA) does not actually extend loans to consumers. Instead, this government agency insures the loans made by primary mortgage lenders. Because of this government backing, lenders are willing to be more flexible with their qualification criteria. You can get approved for an FHA mortgage refinance loan easier than a non-FHA loan, and you can often qualify for a lower interest rate as well.

Notice how I used the word “often” in that last sentence. Remember, none of this is written in stone. Some people are better qualified for refinancing under this program, and each lender has its own standards. With that said, the best way to find out if you qualify is to apply. You can use the link at the top of this blog to do that.

Getting a Lower Interest Rate

There are two primary reasons why people choose FHA home loans. One has to do with initial home purchases, and the other reason has to do with homeowners who refinance. First-time home buyers often apply for FHA mortgages because they are easier to qualify for, and you don’t have to put as much money down in advance. Homeowners use FHA mortgage refinance to lower their interest rates, thus saving money over the life of the new loan.

Of course, in order to make this worthwhile, you have to lower your interest rate by a certain amount. The money you save over your future mortgage payments must exceed the amount you pay in closing costs. This is often referred to as the “break-even” point, beyond which it makes sense to refinance the loan.

At the time of this blog post, interest rates are still pretty low (about 5.42% on a 30-year fixed mortgage). So a homeowner with positive equity has a good chance of getting a lower interest rate through the FHA mortgage refinance program. Equity is the primary obstacle for a lot of homeowners right now, resulting from the housing market collapse of 2008. You’ll probably need at least 10% equity to qualify for an FHA refinance loan, and maybe even more (depending on the lender). To get the lowest rate the lender has to offer, you’ll probably need a credit score of 760 or above.

I’ve said it before, but it bears repeating. None of this is set in stone. The credit score and equity numbers I’ve just given you are merely averages, based on what I’ve read and the conversations I’ve had with lenders. You could, for example, qualify for an FHA mortgage refinance with a lower interest rate, even if your credit score is below the range mentioned above.

There’s only one way to find out — you have to apply for refinancing. You can do so by using the FHA link provided at the top of this website.

If you ask twenty different mortgage or real estate people this question, you’ll probably get twenty different answers. The reason, of course, is that nobody can truly predict how low the rates will go — at least not with any accuracy.

Here’s my best advice. If this is the only thing holding you back, I would seriously consider moving forward with your home purchase. Personally, I think mortgage rates are about as low as they’re going to be for the rest of the year. Sure, they will fluctuate up and down by tenths of a point. But they’ve basically held steady in the upper 4% and lower 5% range for several months now.

Everything I have read suggests this trend will continue for the coming months. That’s a pretty low rate — lower than we’ve had for decades. So, like I said, you should consider taking advantage of them now.

How Low Will They Go?

But don’t take my word for it. Here’s what some of the big news outlets are saying about this subject. Take together, this will give you a pretty good idea how low mortgage rates will go in 2009:

• This U.S. News article suggests that rates might slowly climb toward the 6% range by the end of 2009. Actually, it cites a report by HSH, a mortgage information service.
• The predictions made in this New York Times article are more in line with my own views. It suggests that mortgage rates will hover in the low 5% range for the rest of the year.
• This Business Week article echoes the predictions in the New York Times piece above, putting rates between 5% and 5.25% for the remainder of 2009.

Also, keep in mind that mortgage rates are not the only motivator right now. Home prices are also at record lows in many cities across the U.S. On top of that, first-time buyers can qualify for an $8,000 tax credit if they purchase by the end of the year. So while I can’t say with certainty how low mortgage rates will go in 2009, and I can tell you that now is a good time to buy for well-qualified buyers.

In closing, I want to give you one last piece of advice about buying a home. Before you start talking to mortgage lenders and shopping for interest rates, you should determine your budget. Here’s an article that will help you determine how much you can afford to spend on a house.

Disclaimer: This blog posts provides general advice on how low mortgage rates may go in 2009. This blog provides general information only. We are not acting as financial advisors. Please do not make any financial situations based solely on our advice. Always seek financial help from a professional.

Since you’re most interested in the beginning of the process, I’ll outline all of the home buying steps but with a focus on the initial stages. In truth, if you start this process on the right foot, the rest of it will be fairly easy for you. It’s in the beginning where most first-time buyers make the biggest mistakes. So let’s talk about the first steps to buying a home, and how to do them right.

Home Buying Steps for First-Time Buyers

Many first-time buyers think the process begins with the house-hunting stage. But this is wrong. In truth, there are many steps to take before you start looking at houses. You’ll need to do some financial homework first. So let’s talk about these important (but often overlooked) steps to buying a first home.

Step 1 - Review Your Finances

When you apply for a mortgage, the lender is going to examine every facet of your financial background. They want to know how much you earn, how much debt you have, and how you’ve handled your finances and credit in the past. So it’s a good idea to start examining these things for yourself. Get a copy of your credit reports from all three of the reporting bureaus and review them for errors.

Check your credit score to see where you stand (an important lending criteria), and work on improving your score if necessary. Be sure to make this one of your first steps to buying a home, because it can take time to improve a credit score. Even if you think you’re a year away from buying a house, you should find out where you stand today.

Start saving money — the more of it the better. You’ll need cash reserves to cover your down payment, your closing costs, and moving expenses. Your lender will actually check your bank balances to see if you have sufficient funds for these kinds of things. So start saving now.

It’s also a good idea to calculate your debt-to-income (DTI) ratio, and to pay down your debt as needed. Your DTI ratio is simply a measurement of your debt, relative to your income. In other words, it shows what percentage of your monthly income goes toward debt payments. If your DTI is over 30% or so, you might want to work on paying it down. Of course, this is a balancing act with saving money. This is why it’s so important to start these home buying steps early on — it takes time to get yourself in the right financial shape for the mortgage application process.

Step 2 - Determine Your Budget / Spending Limits

A lot of first-time buyers over look this step to buying a home, and you see evidence of this every time you turn on the news. Failing to set a realistic budget (and sticking to it) is the primary cause of mortgage default and home foreclosure. Many first-time buyers rely on their mortgage lenders to tell them what they can afford, but that’s not a lender’s job. They are in the business of lending money, not giving financial advice.

You should determine your own home-buying budget long before you even speak to a lender. That’s why I’ve listed it here, as one of the first steps to buying a home wisely. I recently answered a buyer’s question about this very subject, so it’s definitely worth reading: How Much House Can I Afford?

Step 3 - Get Pre-approved for a Mortgage Loan

This is another important step when buying your first home, and for several reasons. But let’s start with a definition first. When you get pre-approved for a mortgage, the lender will review your financial background (income, debt, credit score, etc.) and tell you what amount they’re willing to lend you. You can see why this is such an important step for home buyers. It helps you limit your home search to those you can afford, and it also tells the sellers that you’re capable of buying their house.

Step 4 - Find a Real Estate Agent

Do you really need a real estate agent? Is this a necessary step when buying your first place? I would say yes. Without a doubt, yes. Your first house will probably be the largest purchase you ever make, up to that point. So it pays to have professional help along the way.

Step 5 - Start House Hunting

The Home Buying Institute recently published a 2009 house hunting checklist for first-time buyers. I recommend reading through that article, because it’s very well done. Your agent will help you find a home that matches your needs, but you shouldn’t rely solely on that. Do your own searching as well.

You can find homes online that are within your desired price range and location, and then you can ask your agent to set up a showing. Realtor.com is a good place to start. On that website, you’ll find plenty of homes for sale in your area.

Step 6 - Make an Offer

If you’ve followed the recommended steps to buying your first home, you’ll be making an offer before long. During this process, your agent will prepare a written offer with other important terms (length of escrow period, purchase price, contract contingencies, etc.).

The important thing to remember here is that the seller’s asking price is exactly that — the amount they are asking for. That doesn’t mean the house is actually worth that price. Your agent will review recent sales in the area to see what comparable homes are selling for. These are known as “comps.” Your initial offer should be based on this kind of hard data.

Step 7 - Negotiate the Offer

When you make an offer on the house, the seller with do one of three things — accept the offer, reject it, or make a counteroffer to negotiate the price. You need to have a plan for this, and you should also be willing to walk away at some point. In some cases, the sellers may be unrealistic with their asking price (and unwilling to negotiate). These are the cases when it’s okay to walk away. In other cases, they sellers will be more motivated to sell the home quickly. You’ll know when the time comes. And your agent will be able to guide you through the process.

Wrapping Up the First Steps

Obviously, there’s more to the process than this. But you were mostly interested in the first steps to buying a house, so there you have them. At this point in the process, you’ll need to go back to your lender to get final approval for the mortgage loan. The lender will send an appraiser out to evaluate the home, to make sure it’s worth the price you’ve agreed to pay. If all goes well with the appraisal and the home inspection, you are well on your way to closing.

These are the first steps you’ll take when buying a home. I hope this helps you understand the process better, and I wish you well in your real estate endeavors. Good luck.

FHA home loans because have incredibly popular among first-time home buyers in 2009, and there are specific reasons for this. For one thing, mortgage lenders today are requiring higher credit scores to qualify for a loan. Most lenders are also making a 20% down payment mandatory. As a result, there are thousands of home buyers who cannot qualify for a home loan — either because their credit scores are too low, they lack a sufficient down payment, or a combination of these things.

This is where FHA home loan requirements come into the picture. In 2009, FHA loans are becoming a popular financing tool for borrowers who don’t meet the requirements of a traditional mortgage. I’ll focus on the qualification side of things with this blog post, since that is what you asked about. But I’d like to start with a basic overview of what these loans are and how they work.

What’s an FHA Mortgage Loan?

The Federal Housing Administration (FHA) has been around since the 1930s. This organization is part of the federal government, and it falls under the Department of Housing and Urban Development, or HUD. The primary mission of the FHA is to make home ownership available to more Americans. They do this mainly be insuring home loans made by primary lenders (e.g., Bank of America, Wells Fargo, etc.).

When a lender gets this kind of government backing, they are more likely to extend loans to people, even if those borrowers fall short of their core requirements for lending. In other words, a home buyer who has trouble qualifying for a “regular” loan might very well meet the requirements for an FHA home loan.

What are the 2009 Requirements for These Loans?

You’ll notice that the year 2009 is written all over this article. But why? Well, the main reason is that I want to stress the date of this information, because a lot has changed over the last couple of years. As a result of our economic recession, FHA loan requirements and guidelines are slightly different than they were in the past. So much of the information you find online is outdated and inaccurate.

Here is some updated information about FHA home loans in 2009, and what it takes to qualify for one:

Down Payment — This is one of the requirements that has changed this year. The minimum down payment for an FHA loan in 2009 and beyond is 3.5%. Still, this is a lot more affordable than the 20% requirement you would face without FHA backing.

Maximum Loan Size — There are also limits to the size of the mortgage you can take on through the FHA program, as there should be. In 2009, and for the foreseeable future, your loan-to-value ratio (LTV) cannot exceed 100%. In other words, you cannot engage in the “creative financing” tools of the past, such as the 125% mortgage loan. Like most of the FHA requirements, this one makes good sense.

Basic Guidelines — The two criteria listed above represent changes to FHA guidelines. In addition to these things, you’ll have to meet the long-standing basic guidelines for these home loans. This means you’ll need at least two years of steady employment with level or increasing income, a manageable amount of debt, and a solid credit score (probably north of 620).

How Do I Get Started?

If you feel you are reasonably qualified for one of these loans, based on the information I’ve provided above, you should feel confident about taking the next step. And that next step is to request FHA loan quotes from mortgage lenders. If you have had steady income and employment for the last two years or more, you’ve got your debt under control, and your credit score is 620 or higher, I say go for it. You have nothing to lose by getting quotes from lenders.

I can’t tell you how many emails I get from people who ask the question: “Am I qualified for a mortgage loan with a credit score of [fill in the blank]?” Many times, it seems people will ask this question of everyone except the one person who can answer it — a mortgage lender. Go straight to the source, is what I always tell people. Using the Internet, you can find out if you qualify for a loan in no time at all. Use the link I’ve provided above to get started.

This article answers the question: What are the FHA home loan requirements in 2009? If you have a mortgage-related question of your own, use the button provided at the top of this site to email it to us.

Whether you realize it or not, you answered your own question already. You used the phrase “in the past,” which is sort of what has happened with no-closing-cost mortgage loans. This type of financing was fairly common in the past, but it’s harder to come by today. This is mainly the result of the economic recession we have had. With that being said, I would predict that no-closing-cost loans will be making a “comeback” in the coming months.

Let me offer a bit of background, for readers who are not familiar with this topic.

What Are Closing Costs Anyway?

When you take out a mortgage loan to pay for a home, you will pay a variety of fees and charges on the loan. They include processing fees, legal fees, origination fees … you get the picture. Lots of little add-on charges. Collectively, these are referred to as closings costs, because you pay them when you close on the loan (during the final settlement / closing procedures). On average, these costs can add to about $3,000. This number will vary, depending on the amount of the loan and the state where you purchase the home.

In the past, some mortgage lenders would offer to waive these fees, in order to attract borrowers. As you might imagine, this is referred to as a no-closing-cost mortgage loan. In most cases, however, the lender would make up for this financial loss (on their part) by charging a higher interest rate. And depending on the rate, the borrower might end up paying more over the long run than what they save up front.

Are These Mortgage Loans Still Available?

So let’s move on to the next part of your question. Can you still find no-closing-cost loans these days, and if so where should you go to learn more? In our current and troubled economy, it’s going to be a lot harder to find a lender that’s willing to waive their closing costs on a mortgage loan. And if they do waive the fees, you be sure they’ll make up for it through the interest rate in some way. So with this type of loan, you are essentially transferring some of the upfront costs onto your monthly mortgage payments.

This is certainly a viable option for some people, especially first-time buyers who don’t have a lot of cash for these upfront fees. But you need to realize what is happening with this approach. Basically, you are increasing your monthly payments in order to lower the upfront payment.

In order to find a no closing cost mortgage loan, you would have to do one of two things — talk to a broker, or go directly to the lenders and see what they have available. You might also want to do a Google search for that phrase and then scan the results for well-known lenders such as Wells Fargo and Chase. I don’t know if these lenders will waive closing costs, but that’s a good way to find out.

Over time, as we begin to put this economic mess behind us, I’d be willing to bet that more lenders will start offering this option again. It’s the same thing with subprime loans for people with bad credit. They have gone away for the time being, but they will probably make a comeback at some future point in time. Good old-fashioned greed will bring all of these mortgage products back, back eventually.

I did a little research to get you started, with some of the big national lenders in the U.S. Here is what I found. Just keep in mind that a local lender might be able to give you better options than a national name, so be sure to shop around.

• Wells Fargo — They have a mortgage product called the Closing Cost Saver program. One of the advertised benefits is that buyers can pay little or no money out-of-pocket at closing. I don’t know if they are still offering this, or what the stipulations are, but you can check it out for yourself. Learn more here
• Chase Mortgage — They offer a program that’s designed to save you money at closing by reducing the fees you have to pay. They claim that it can save you up to $2,000 on closing costs. Learn more here
• Citi Mortgage — I could not find anything on their website, but feel free to do your own research.
• Bank of America — Couldn’t find anything here either.

I hope this gets you pointed in the right direction. My advice is to save enough money so you can pay the fees at closing, in order to keep your interest rate low. You’ll save money in the long run if you do that, and you’ll keep your monthly mortgage payments at the lowest possible level (given your credit score and other qualifying factors).

This article answers the question: What is a no closing cost mortgage loan, and where can I find one? If you have a question of your own, click on the “Ask a Question” button at the top of this blog to send it to us. We will post a response right here on the blog.

In many cases, first-time home buyers don’t even realize they are using a broker. All they know is that they requested some quotes online, perhaps, and were later contacted by a person who turned out to be a mortgage broker. In other cases, buyers understand the difference between lenders and brokers and choose the latter for some very specific reason.

I’ll get into the pros and cons of this in just a moment. But first, I want to offer some basic definitions, to make sure we are on the same page. Here’s the difference between a mortgage broker and a lender:

• Lender - This is the bank or financial institution that actually lends you the money for the home. There are national lenders, such as Wells Fargo and Citi, as well as local ones. These organizations are also referred to as primary lenders, which means they offer loans directly to consumers.
• Broker - This person is basically a middle-man between the borrower and the primary lender (defined above). Mortgage brokers usually have access to a network of lenders, which helps them match the best loan to a particular borrower.

With those definitions out of the way, let’s talk about why you would use one over the other. We will also talk about the pros and cons of using a broker to find a loan.

Why Use One?

I just touched on the main reason why people use mortgage brokers when buying a home. It can be summed up in two words — more options. If you go straight to a bank and apply for a home loan, you will only get the best rates and terms for that particular lender. But a different lender might have better options for you, given your financial circumstances. This is where it helps to use a broker to find a loan. He or she can “shop” through a wider variety of lending institutions, in an effort to find the best loan for your situation.

Pros and Cons of Using a Mortgage Broker

We just talked about the pros of using a mortgage broker to find a home loan. You have access to a wider range of financial products. This is the primary benefit that motivates people to use a broker in the first place. In theory, this would help you secure the best interest rate and terms on your new loan.

But what about the cons of using one of these folks? Are there any disadvantages to this “middle man” approach? Yes. You may have to pay additional fees when you go through a broker instead of applying directly through the bank.

There is also a certain negativity associated with mortgage brokers, which results from various deceitful tactics they use to lure in borrowers. A favorite technique among the “sharks” is the low-rate teaser offer. The broker will offer the consumer an enticingly low interest rate, but will then tack on points and other fees that boost their own earnings.

Here’s the bottom line. If you decide to use a mortgage broker when shopping for a loan, you need to do your homework. Most importantly, you should find out who is paying the broker’s fees — you or the lender. You should also research the person’s background, and this is where the Internet becomes helpful. You’d be surprised what you can find by doing a Google search for a broker’s name, or the company’s name. You can also check the Better Business Bureaus website to see if any complaints have been filed against the company.

This article answers the question: Why use a mortgage broker when shopping for a loan? If you have a question of your own, click on the “Ask a Question” button located in the upper-right menu area. We will post a response right here on the blog.

You’ve touched on an important topic, and I’m glad you’ve asked this question. Let me start with the second part of your question, and then I’ll expand on the topic. In reality, a lender cannot tell you what you can afford to pay for a house. They can only tell you the maximum amount for which you are qualified to borrow. Note the difference here, because it’s an important one.

Being qualified for a certain loan and being able to afford it are not the same thing — that’s why we have so many foreclosures across the country right now. People got approved for mortgages that were too big for them.

Whenever I say this to home buyers, their next question is usually something this: “But why would a bank approve me for a risky loan that might be too big for me down the road?” They do this because of the secondary mortgage market (i.e. Freddie Mac and Fannie Mae). These corporation buy loans that are made by primary lenders. So, in essence, a primary lender like Citi or Wells Fargo can make a loan and then sell it off to somebody else. Goodbye risk! They make the profit, and they sell off the risk to somebody else.

But that’s another story entirely. Let’s get back to the question at hand. How much can I afford to spend on a house / mortgage? We have addressed the first step already. Don’t let a lender tell you how much you can afford to pay. They are not your financial advisor. They are in the business of making money. They do not care about your financial well-being or your quality of life. Sorry, but that’s just the reality of the relationship.

Figuring Out What You Can Afford to Spend

Here’s the key to figuring out how much house you can afford to buy. Measure your income and your expenses at the monthly level, and then see what you have left to put toward a mortgage loan. Here’s how you would do this:

1. Add up your monthly expenses (groceries, car payments, savings, entertainment, etc.).
2. Leave your monthly rent payment off the above list. That expense goes away when you buy.
3. Next, write down your monthly gross income. This is your take-home pay, after taxes.
4. Subtract your monthly expenses from your monthly income. Circle the resulting number.

The number you circled is what you have available to put toward a mortgage loan. You certainly don’t want to use that entire leftover amount for a mortgage payment — that’s stretching yourself too thin. But at least you’ll know the maximum you can afford to spend on a house (through monthly payments).

I would reduce that number you circled by 10% to 15%, so that you still have money left over each month after paying your mortgage. It’s always good to have an “emergency fund” of extra cash on hand.

Here’s an example scenario…

Let’s say I make $5,500 per month after taxes, and I spend about $2,200 per month in expenses. These expenses also include the money I put aside for savings each month, which is an important point. I subtract my expenses from my gross income, and that leaves me with $3,300. I would not put this full amount toward a mortgage loan, and a lender probably wouldn’t approve me for that much. It’s too much of a mortgage in relation to my income. Personally, I would reduce this remainder by at least 15% to get a more comfortable monthly-payment limit. That would take me down to a payment cap of around $2,800. That’s still a bit high, if you ask me, but we are now reaching a more realist number.

In the above scenario, I can afford to spend around $2,500 per month on my house payments. Most importantly, I would not be “house poor” — I’d still have money left over each month for other important things.

Does this mean that a lender will approve me for a mortgage loan with payments in this range? Maybe. They might approve me for more, or they might approve me for less. If they approved me for a higher amount, it should set off red flags in my brain. Sure, they think I’m approved for that amount — but it doesn’t mean I can actually afford to buy a house at that price. How do I know this? Because I’ve already done the math, created a budget, and established my own maximum payment size.

This is what you should take away from this lesson. You need to determine how much you can afford to spend on a house before you even talk to a lender. You need to know where your financial comfort level lies, and you need to stay within those limits.

Time for Some Tough Love

I’ve long had the opinion that home buyers have a rosy picture painted for them, courtesy of mortgage lenders and housing advocacy groups. They talk about the concept of universal home ownership, where every buyer can qualify for a mortgage loan to get a house. I don’t know what fantasy world these people live in, but that’s not how it works in the real world. Home ownership is something you have to work toward. You must earn the privilege by being financially responsible, saving your money, etc.

The same goes for making your mortgage payments. You are the responsible party here. If you knowingly spend more on a house than you can afford, and you end up in a foreclosure situation down the road, you will have nobody to blame but yourself. Don’t blame the bank. Don’t ask the government (i.e., taxpayers) to come bail you out. Just accept that you made a gamble and lost.

Of course, all of this hardship is easy to avoid. You simply have to be smart and buy within your financial means. Use the steps I’ve outlined above to figure out how much you can afford to spend on a house, and stay within that budget!

I can’t answer the cost question for you, because there are too many variables at work. The cost will vary based on the value of the home, the location, and the contents within the home. On average, homeowners in the U.S. pay somewhere between $400 and $600 per month. The only way to find out for sure is to get a homeowners insurance quotes from multiple providers. You can get quotes online these day, so it’s an easy process. But before you can do that, you need to determine how much you want to cover with the policy. So let’s address that side of your question…

What does homeowners insurance cover? This is a common question among first-time home buyers. Once again, however, there are many variables at work. You have a lot of choices to make when you choose your insurance policy, so your policy might be different from your next-door neighbor’s policy. Generally speaking, a home insurance policy will cover the cost to replace the home (up to a certain amount) and the contents within the home (personal property).

If you life in a flood-risk area, you will have to purchase an additional policy — or a rider / addition to your primary policy — for flood insurance. Homeowners insurance typically does not cover flood damage, so you’ll have to get that coverage separately. You can learn more about this by visiting the government’s flood insurance site: http://www.floodsmart.gov

When you set up your policy, you should also make sure it covers the contents of the home (i.e., personal property). If you want the best coverage, you should insure your personal property for replacement cost instead of cash value. If you choose the cash value option, the insurance company will factor in depreciation when replacing your belongings. If you choose the replacement cost option (my recommendation), the company will cover the full cost of replacing your property with items of equal value, quality, etc.

So, to sum up, your homeowners insurance policy will cover whatever you set it up to cover. And obviously, the cost will vary based on the amount of coverage and the size of your deductible. If you want to lower the monthly cost of your homeowners insurance without sacrificing coverage, you can increase the amount of your deductible. This will lower your monthly payment while offering the same protection.