Wunderlich

As a first time buyer you have taken an important step. You are now clear in your mind about the size, amenities, the type of location, etc of the house you want to purchase. The next step now is to organize the finances for the purchase.

You will have to incur some expenses towards the purchase of the house from your savings or funds you may raise from your personal sources and the rest will have to be raised as a mortgage loan. At the time you sign a contract for purchase with the seller, you will be required to pay about 10% to 20% of the price as earnest money. Apart from this there are other expenses such as solicitors fees, search charges, etc amounting to about 4% to 6% of the price of the property which you must keep a provision for.

Lenders will loan an amount that they feel you can safely be expected to repay (with interest). A lender studies your known income, your pattern of repayments on credit cards, outstanding and repayment records of loans for car, computer, large household goods, etc. to see your credit worthiness before committing to any loan amount. A lender generally is looking for a debt-to-income ratio of 28/36 for a safe loan; this means that he expects that about 28% of your total monthly income before tax will go towards repayment of mortgage and your total debts (mortgage repayment, credit card payments, education loan repayments, car loans, etc put together) will not exceed 36% of your total monthly income before tax.

As a rule of thumb you may not be able to raise a mortgage of more than about 2.1/2 to 3 times your annual gross earnings and in general you would not be able to spare more than 25% to 30% of your monthly take home towards mortgage repayment.

With this information in view, you start assessing your position. To start with you note down your yearly earnings including any incentives, bonus, etc. as well as any other incomes you may have. Now you note down all fixed expenses such as rentals, taxes, energy bills, water bills, insurance payments, food, transportation, entertainment, clothing, etc. Any expenses such as holidays, occasional repairs, etc of car or other appliances you are liable to pay also shall be accounted for. The purpose is to find out how much is the amount of money that you can spare after taking away all these expenses from your earnings. When you raise a mortgage for purchase of the home, it is this residual amount from which the interest and amortization payments will be made.

There are many different types of mortgage schemes available. Generally the mortgage term, the period over which the mortgage is repaid, is either 15, 20 or 30 years. Obviously longer the term, relatively smaller will be the monthly installment; needless to say, the total payment you make in case of a longer term is more than what you would pay for a shorter term.

There are fixed rate mortgages and adjustable rate mortgages. In a fixed rate mortgage the interest remains constant over the entire term; in an adjustable rate mortgage the interest rate is revised periodically to bring it in line with market rates. There are many other variations in practice and it would be possible for you to negotiate a repayment regime that fits in with your needs. For instance, you could negotiate a mortgage in which you pay only the interest over the term and pay the principal amount at the end in one payment; this type of regime will suit you if you are planning to sell off this home, pay off this mortgage and buy another house after about 10 or 15 years, or you may seek refinance at a later stage to pay off the principal amount.

There are many variations possible and even though it may be possible for you to work out a suitable mortgage for yourself, it would be better in the long run for you to consult an independent financial adviser or a mortgage broker to advise you on the best type of mortgage for your needs.

Keep a couple of things in mind. Before you start looking around for properties and start contacting agents, it would be in your interest to get mortgage prequalification letter from the lender; the lender will look at you income level, your debts (if any) and credit information and give an estimate of what you can afford. This is not a commitment from the lender; but it serves two purposes one, you know a ballpark figure of what you may be able to get and it will show the estate agent or the seller that you are a serious buyer and you can afford the house.

When you have been able to zero in on a particular house for purchase, you can approach the lender for mortgage preapproval. Lender gives a preapproval only after making a thorough study of your situation, your credit reports and your debt-income ratio. Mortgage Preapproval from lender gives you an edge in negotiations with the seller because the seller knows that you are in a position to close the deal in a short time and would be able to make the final payment without any loss of time.

A word of caution would not be out of place. Once you have approached a lender for prequalification or preapproval, do not make any major purchases which can change your credit rating with the lender.

Mortgage is a very important subject and requires a thorough study; unfortunately we would not be able to discuss it any further here.

S. Phadke is a retired electrical/control engineer, with over 45 years experience in senior positions in India & abroad. He has wide ranging interests. He enjoys writing and has been writing articles on Real Estate, Conveyancing, Retirement, Energy Conservation, Home Based Industries , Online Data Storage, Networking, etc. He can be contacted at snphadke@gmail.com His blog URL is snphadke-energyreview.blogspot.com