# Jeff Boyce - Realtor

# HomeSmart Cherry Creek

How much does it "cost" to BUY a home?

There are TWO very important things you need to know going from being a renter - to becoming a home buyer:

1. What are my mortgage loan payments going to be?

2. How much cash will I need to buy a home?

The easiest way to explain this, is - you're going to 'qualify' for a mortgage loan

based upon your a) current income and your b) current monthly debt

obligations. The chart below will give you a pretty good idea on what you can

expect your mortgage payment to be, based upon buying a home in Highlands

Ranch with a FHA (Federal Housing Authority loan.)

For example, on the $400,000 loan, I used a 4.5% interest rate on a FHA

30-year fixed rate loan - with a special $2,500 Down payment (that "anyone"

can qualify for if your gross household annual income is below $121,000

- which is $10,083/month income. Please call me at 303-622-5700, and I'll explain this FANTASTIC loan program, saving you $14,000 cash out-of-pocket!!) If you do NOT qualify for this this $1,000 Down program, you will need to do the regular 3.5% Down payment - or $14,000 on a $400,000 loan (or 96.5% LTV - Loan to Value.) The P & I payments below will be similar to a Conventional or VA loan.

Loan Principle & Taxes/ Insurance/ FHA HOA/ P.I.T.I. TOTAL Est’d Monthly Income

Amount Interest month month M.I.P. month? Payment needed (31-40%) to Qualify

$325,000 $1,645 $108 $106 $230 - $2,163 $5,400-$7,000

$350,000 $1,774 $141 $106 $247 - $2,345 $5,670-$7,320

$375,000 $1,985 $144 $106 $265 - $2,499 $6,300-$8,060

$400,000 $2,027 $159 $106 $283 $49 $2,693 $6,730-$8,690

$425,000 $2,250 $187 $106 $300 - $2,843 $7,100-$9,170

$450,000 $2,280 $216 $106 $318 - $2,920 $7,300-$9,420

On a mortgage loan monthly payment, you have your Principle & Interest amount (currently mortgage rates are at about 4.5% on a 30-year fixed rate.) This example the P & I is at $2,027/month.

The annual Property Taxes vary from house to house, city to city, and are divided by 12, but will be about $159/month on most Highlands Ranch homes around $400,000.

The Property Insurance, or casualty insurance - is what you'll pay

to have the home covered from damage, just like your car. An average

home policy price in the Denver Metro area will around $1,275/year -

depending on the deductible you want and your CREDIT RATING; or

about $106/month. (If you have lower credit scores, your policy could

be 25-50% more!!)

Since you are NOT putting 20% down payment (lowering your risk of

'default' to the Lender) - you'll pay mortgage insurance on a FHA or

Conventional loan. On FHA loans, you have an "Upfront and Monthly"

mortgage insurance payment. The Up-Front (MIP) Mortgage

Insurance Premium - is 1.75% of the loan amount, regardless of the

LTV (Loan to Value). It's typically added to the purchase price & financed (so, a $393,000 home price x .0175 = $7,000, thus a $400,000 loan.) The Upfront and Monthly MIP are the insurance policy to the Lender that you won't 'default' or go into foreclosure on their loan to you. The FHA MIP have nothing to do with your property Insurance.

BONUS: As you pay down the principle - and as the home appreciates in value, many Denver metro area homes only need about 2-3 years before you can get the 80% LTV equity position for the Lender, and you can DROP the monthly MIP and get back the pro-rated Upfront $7,000 MIP!!! Roughly about $4,000 back to you after about 3 years, and NO more $283 monthly MIP.

The Annual MIP policy is .0085 x loan amount. It's then divided by 12

months ($400,000 x .0085 = $3,400 % 12 = $283/month.) It's an annual

policy that you pay monthly, just like your Property Insurance & Taxes.

You can DROP this monthly payment too - as soon as you get 80% LTV on

your home!

BTW - not all Subdivisions have Home Owners Associations (HOA's) - but

many popular newer Subdivisions do have them. Highlands Ranch has 1

main HOA, but some of the other subdivisions in Highlands Ranch have a

second HOA!! The main HOA fee for most Highlands Ranch homes is

$592/year - or about $49/month. Castle Rock homes in The Meadows

HOA fee is about $72/month - and the popular newer Reunion subdivision in Commerce City HOA is about $33/month.

The term P.I.T.I - is the total house payment with Principle, Interest, Taxes & Insurance. In my example above, I included the FHA monthly MIP and a $49 HOA. So, a $400,000 loan, in Highlands Ranch - you'd pay about $2,693/month.

But - if you put 20% Down (from your savings/401k, for example) - your PITI would be only $1,959/month with the Highlands Ranch $49/month HOA. In a different subdivision with NO HOA - your PITI payment would only be $1,910/month. Does this make sense?

The "last" column in the table above is your "Estimated" Monthly Income needed (31-40%) to Qualify. Both the FHA and Conventional loans have "qualifying criteria" called Front-End and Back-End debt ratios. These are actually really easy to understand! The Front-End Debt ratio - is your Gross Monthly Income x 31-40%. In the example above, at $400,000 and a $2,693 PITI - you need to make between $6,730-$8,690. Let me explain - so, if you have the lowest qualifying Credit Report scores of 580, by FHA current rules - your Monthly PITI house payment can not exceed 31% of your gross monthly income.

So, to qualify with a 580 credit score, on your Front-End Debt ratios - take the

$2,693 PITI divided by .31 = $8,690.

That means your family income needs to be at $8,690+ per month - or

$104,280/year to qualify for a $400,000 loan, with PITI payments of

$2,693/month. That's pretty easy.

However, FHA will "reward you" if you have HIGHER credit scores & a larger

savings/401k's - and let you go UP to a 40% Front-End Debt ratio. (Do you see

"why" it's SO IMPORTANT to get your Credit Scores repaired and as HIGH as

possible?) This exception or "reward" up to a 40% Front-End Debt ratio is on

a "case-by-case" basis - and is a DIRECT RESULT of a mortgage company pulling your "Tri-Merged Credit Report" and adding it to your Loan Application info and income. When the mortgage company does this - it's called a "Conditional Pre-Approval".

So, at the 40% Front-End Debt ratios - take the $2,693 PITI house payment divided by .40 = $6,730. That means your family income needs to be at $6,730+ per month - or $80,760/year to qualify for a $400,000 loan, with PITI payments of $2,693/month. Does that make sense? So - with a "better financial picture" - you can qualify to BUY the exact same house making $80,760/year!!

Or the worse case: $104,280/year income and $8,690+ per month

MINIMUM - with a lower 580 credit score!!

The other qualification is the Back-End Debt ratio. It's the TOTAL of all

your monthly debt payments - that the FHA will allow you to have, with

the range of 43-50% or so. (Your monthly debts are your VISA payments,

car loans, furniture loans, revolving credit cards like Macy's, Target, Dillards,

etc.) We have to do "Algebra" - and 'estimate' your PITI payment and solve

for the unknown, on Back-End debt ratios - they are a bit more 'confusing'!!

So, the FHA rule says with a 580 credit score, you can have a TOTAL

minimum monthly debt payments NOT to exceed 43% of your gross monthly income. With great credit and HIGHER credit scores, like the Front-End Debt ratio qualification - you can go UP to about a 50% Back-End Debt ratio. Let's do the math on these:

Again - let's assume you want a $400,000 home with a monthly PITI payment of about $2,693. We need to know YOUR exact monthly credit card, car loan, other loan payments - to do this!!

So, let's assume you and your spouse each have VISA credit cards, one at $150/minimum monthly payment and the other at $50. Let's say you have an American Furniture Warehouse purchase of $4,000 - with a monthly payment of $100. You each have car loans - one is $300/month and the other is $200/month. Finally, one of you has a student loan monthly payment of $275, and the other one has a Target card at $25/month. So YOUR total monthly minimum payments are: $150 + $50 + $100 + $300 + $200 + $275 + $25 = $1,100.

Now, you want the $400,000 home - so we add in the $2,693 PITI + $1,100 = $3,793 total monthly debt. Right?

So we take the $3,793 and divide by .43 Back-End debt ratio = $8,820/month. Or - YOU need to make a minimum of $8,820/month or $105,840/year to qualify for that house payment - worst case scenario with a 580 credit score.

But - at the 50% Back-End Debt ratio (with HIGHER credit scores and savings/401k) - we again take the $3,793 total monthly debt divided by .50 = $7,586/month. Or - you only need to make $7,586/month, which is $91,000 year income - to qualify on the Back-End Debt ratio with great credit and savings!!

So, we do "algebra" - based upon YOUR current monthly minimum debt payments, to determine how much you can qualify for on a purchase price, and that exact monthly PITI payment - depending on the Property Taxes, Interest Rate on the loan, HOA - if any, Property Insurance, and the Mortgage Insurance Premium (MIP).

Let's say your monthly debt payments were double the $1,100 example -

or $2,200/month instead.

The Back-End debt ratio at 43%, worse-case scenario would be $2,200 +

$2,693 PITI = $4,893. So $4,893 divided by .43 = $11,380/month - or in

other words, you'd need to make $11,380 a month to qualify now - which

would be $136,560/year income.

Best case scenario at a 50% Back-End debt ratio would be $2,200 + $2,693

PITI = $4,893. So $4,893 divided by .50 = $9,790/month - or in other words,

you'd need to make $9,790 a month to qualify now - which would be

$117,480/year income.

You MUST qualify on BOTH the Front-End and Back-End Debt ratios on every FHA, Conventional and VA loans!

The higher your income & the lower your current monthly minimum debt payments are - the "more expensive" home you can afford, and vice-versa.

Another challenge – if your family gross annual income is over $115,000, you’ll need $14,000 down on a $400,000 FHA 3.5% down loan, plus $7,000 to $10,000 in closing costs/pre-paid escrows. This money can come from your savings, 401k's - or even a 'gift' from your Mom & Dad, Grandma & Grandpa, or brother and sisters. We’ll discuss “seller paid” closing costs – when you call me! Plus, many New Builders are offering true $0 Down Loans that we can discuss too. And - the Credit Union of Colorado now offers a $0 Down Conventional loan - with a credit score at 700 or higher and total debt payments that don’t exceed 43 percent of income.

It’s very likely we can go out “house shopping” with you only needing about $2,000-$3,000 cash to close on a beautiful home, as long as you make under $80,000/year - or you have the 3.5% down payment. I would say that about 85% of ALL the home sales I’ve done for renters and first time home buyers – this was all the money they needed to BUY a home. When you get really good expert help, all joking aside, it’s often easier to BUY a nice home, than it is to buy a car!

Call me right now at 303-622-5700 – and let’s talk about YOUR specific

renting/home buying situation – and turn YOU into a home owner

instead of a frustrated renter.

Thanks again!

Jeff

Jeff Boyce

(303) 622-5700

“$100+ Million Personally SOLD/Closed Since 1998”

p.s. - With the 7-10% or so increases in Denver Metro area home prices over the last 3-4 years - most nice neighborhoods keep pricing renters out of buying homes! Quit procrastinating and CALL ME – I’ll help you get finally get “APPROVED” to buy your home - instead of paying your Landlords mortgage loan.