Mortgage Rate News

One of the main questions that many people have is what is the mortgage payment that they can afford. This is an important question because, as we are finding out in the aftermath of the subprime lending crash, if you can’t answer this question properly, you could be out of a home.

Two rules of thumb for mortgage payment

There are two different rules of thumb that you can use (you can even combine them) to determine the mortgage payment you can afford.

25% Rule. This rule states that your monthly mortgage payment should be no more than 25% of your monthly income. Therefore, if you make $4,000 a month, your mortgage payment should be no more than $1,000. To be extra safe, I like to include all of my housing expenses in that number. My mortgage payment plus insurance plus taxes should not exceed 25% of my monthly income.

45% Rule. This is a rule that comes from personal finance guru Suze Orman. She says that if you are looking to get a mortgage payment similar to what you pay in rent or your current mortgage, you should take 45% of that and then add it. If you are paying $800 right now, you multiply that by .45 to get $360. Then you add the $360 to the $800. $1160 would be the true cost of your home ownership.

Testing out your ability to make the mortgage payment

Buying a new home should be a process. Instead of doing it on a lark, you should plan ahead. Test whether you really can afford to pay more in for a mortgage. Take six months to do this. First, figure out the mortgage payment you think you can handle. Then, look at what you pay now in rent. If you think you can handle $1,200 and you pay $800 in rent, that is a $400 difference. Pay your rent as usual. Then take that $400 and put it in a savings account.

Do this for six months. Are you struggling? Do you have to raid your savings to make ends meet? If you are having trouble, the mortgage payment you picked is too high.

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Many people feel as though it is impossible to get a home mortgage after bankruptcy. And, while the current credit market crunch might make it even more difficult, it is possible to get a home mortgage after bankruptcy. But you will need to show that you are working to rebuild your credit, and that you have been acting responsibly since your bankruptcy.

Fixing your credit after bankruptcy

The first thing you need to do is work on fixing your credit after a bankruptcy. This is time to start fresh. Apply for small amounts of credit that you can pay back. A secured credit card is one of these types of tools that can help you improve your credit score. Create a budget and stick to it. Live well within your means, and set aside some savings. This will help you manage your money better, and you can start saving up for a down payment. Pay all of your bills on time, and in full.

Asking a lender for a home mortgage after bankruptcy

Art of Abundance points out that you should be up-front with your lender when you try to get a home mortgage after bankruptcy:

When you talk to lenders about pre-approval, be up-front about your bankruptcy — and be equally as up-front about the great job you’ve done rebuilding your credit in a short time.

You may have to provide a letter or statement explaining why you had to file bankruptcy (the death of the provider, a divorce or a medical catastrophe are all extenuating circumstances that may be considered). You will also have to outline the steps you are taking to rebuild your credit. If the bankruptcy was beyond your control, show how responsible you were before the devastating events that ruined your finances. If it is mostly due to consumer debt, show how you better understand finances, and how you are determined to be more responsible in the future.

Your bankruptcy can remain on your credit report for 7 to 10 years. Try and wait at least 2 years, building your credit score, before applying for a home loan. And if you try to get a home mortgage now, after bankruptcy, realize that the lending standards have tightened and that you will need to have a higher credit score. And you will pay more in interest (you can consider refinancing down the road). Even though you may have a harder time, it is still possible to get a home mortgage after bankruptcy.

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Yesterday we looked at some of the mortgage incentives offered by Bank of America to try and get borrowers to choose that company. But Bank of America is far from the only lender offering mortgage incentives. From green mortgages to first time homebuyer programs, the mortgage lending world is awash with mortgage incentives. The latest move in mortgage incentives is to combine products that lower upfront costs with the customer-friendly image. Inman News reports on the desire to be customer-friendly:

As the questionable practices employed by some mortgage lenders during the housing boom come under public scrutiny, lenders who can position themselves as consumer-friendly expect to benefit from borrowers’ heightened skepticism.

This is a good point. So, do mortgage incentives come with transparent policies that clearly state that in some cases a mortgage interest rate will be higher? Probably not. But there are more than just monetary incentives. Some lenders offer to plant a tree in your name if you go through them, helping you feel as though you are helping the planet when you go through them. Other lenders offer such mortgage incentives as a savings bond or a donation to a local charity in your name.

But no matter the mortgage incentives, it is a good idea to look past the hype, especially when it comes to the incentive of customer-friendly service. Inman continues:

Any mortgage lender or broker can claim to be looking out for their clients’ best interests. Jack Guttentag, a syndicated columnist who writes about mortgage lending, has created a set of criteria he thinks are essential for such claims to hold weight.

Guttentag defines “upfront mortgage lenders” as companies that provide prices online, disclose all lender fees including points, origination fees and fixed dollar fees, and guarantees them to closing. He says upfront lenders disclose all third-party fees, provide clear explanation of lock requirements (including payments), and disclose how loan officers are compensated.

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green mortgages, mortgage interest rates, first time homebuyer programs