Many mortgage companies will try to sell the sizzle instead of the steak. In other words, they don’t want to discuss price. A savvy shopper will make sure that they shop around and avoid the vendors who try to obscure price and don’t use standard methods of displaying loan information.

So what can you do to protect yourself when shopping for a loan? First pick a couple of banks and a couple of mortgage companies and put them on your list. Next ask each organization for a GFE (good faith estimate). If they won’t provide you with a GFE then mark them off your list.

If the company wants cash or a credit card before they’ll start to work with you or provide you with a GFE then mark them off your list. Also, if the individual you’re working with is speaking a million miles a minute and tries to obscure the true terms of the loan make sure to mark them off the list.

More on loan shopping in the next post…

In order to get this house you end up looking at some more innovative ways to finance the property. The problem is that you should pick the property based on your budget not the other way around. How do you determine how much you qualify for and how do lenders go through the process of determining how much you can borrow?

Lenders go through several steps to determine what range is acceptable to lend you for a home. One area where they look is determining your debt to income (DTI) ratio. The general acceptable DTI range is 40% to 45%. Determining your DTI is pretty simple. First, you add your new house payment, auto loans, student loans, and credit card payments and total them up. Then you compare this amount and determine what percentage of your income is to your debt payments.

For example, let’s say that a couple makes $5,000 a month (gross). Take the $5,000 and take it times .45 (45%). This equals $2,250. This figure is the generally accepted maximum for total debt expenditure based on income.

Now let’s say the couple has a $100 a month student loan payment and $500 a month in credit card payments. This leaves $1,650 for motgage payment, property taxes, and insurance. Let’s subtract $250 a month for the taxes and insurance. This leaves us with $1,400 which allows us to purchase approximately a $210,000 home at 7% over 30 years.

Remember that you don’t have to be at a 45% debt ratio, you can certainly be at less. The important thing to remember when shopping for property is to not exceed the 45% DTI ratio.

Mortgage companies want to invest their money with a reasonable chance for return, not gamble with it. Therefore, one of the first steps when shopping for any kind of real estate is to make sure your credit is acceptable.

So what is an acceptable level of credit? Well the general consensus is the minimum to pass most automated systems is 620. Credit scores range from a low of 400ish to a high of 850. Most lenders will pull all three of your scores and use the mean (not the average). So if your credit scores from the big three credit companies was 590, 630, and 640 then the 630 score will be used.

Your credit score along with some other factors from your application are generally fed into an automated program with one of three possible results.

1. Accept- hooray!

2. Review- there is still hope but a human will now review your application and make a decision.

3. Deny- Yikes!

What can you do to increase your score? Here are some general tips to increase your credit score today.

1. Get a free credit report. You’re entitled to one free report from each of the agencies on a yearly basis so that you can see where you stand.

2. Correct errors on your credit report.

3. Make sure you are up-to-date on current credit cards or loans

4. Pay down your credit balances

5. Avoid applying for new credit. Excessive inquiries on your credit report can lead to a lower score.

6. Keep accounts that you’ve held for a long time open. Long term accounts demonstrate a level of responsibility by the borrower.

In the next article we’ll discuss some helpful next steps as you’re applying for your real estate loan. We know you can hardly wait!

Reason number one- The seller may need cash for the downpayment on the next piece of property he or she is buying.

Reason number two- To protect himself or herself in case the value of the home declines. If you were to default on your payments then the seller will take back the house and sell it again. If the value of the house declined the seller/lender ends up losing money on the house.

Reason number three- If someone purchases a property with a downpayment, then that individual has something invested in that property. Therefore, from the seller or lender point of view, the buyer is more likely to take care of the property.

In order to determine how much home you can afford we need to look at two things.

1. How much of a downpayment can you make?
2. How much can you pay monthly for mortage interest and principle payments, as well as for property taxes and insurance?

Until you first find answers to these two questions, you can’t really begin to look for a home.

In the next few posts we’re going to spend a considerable amount of time taking a look at answering these two questions for home buyers.