YOUR MONEY
CREDIT, COLLEGE, TAXES AND REAL ESTATE
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EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.
Lenders look at three things when you apply for a mortgage: credit score, debt-to-income ratio and down payment. "If you've got two of the three elements working for you, you're in good shape to buy," says Jim McMillan, a senior loan officer with JP Mortgage/JPMorgan Chase.
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All lenders are credit-score driven these days. FICO scores, the most commonly used, range from 300 to 850. The higher your score, the more flexible lenders will be. With a score of 700 or higher, syas McMillan, you'll be considered an A borrower and qualify for the best rates.
Another consideration is your debt-to-income ratio. Traditionally, lenders have followed the 28/36 rule: No more than 28% of your monthly gross income should be dedicated to your mortgage payment, property taxes and insurance, with total debt payments equaling no more than 36% of your gross income.
This means if you make $40,000 a year, your payment for your mortgage, property taxes and insurance should be no more than $933 a month. Payments on total debt should be no more than $1,200 a month.
But if you have no other debt, you can dedicate 36% of your income -- $1,200 in our example -- to housing payments. With an FHA-backed loan, you may be permitted to apply up to 41% of your income to total debt.
The more money you put down, the less risk the lender takes on - and the more likely you are to snag the loan. A 20% down payment is the threshold at which you're exempt from private mortgage insurance, which can add a few hundred dollars to your monthly payment. PMI is totally tax-deductible for 2007 if your adjusted gross income is less than $100,000, and Congress is expected to extend the tax break into 2008. Contracts written before 2007 are ineligible for the deduction.
Order your copy of Kiplinger's special issue Success With Your Money. It will tell you how to make the most of your money -- and make a seamless transition to the next phase of your life.
