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Financing 101: How Much Home Can You Afford?

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Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a home or apartment. Additional questions welcomed to tips@curbed.com. Today's topic: the basics of mortgages!

In an earlier installment of Curbed University, we discussed some basic mortgage terms and some situations in which it might be better to skip the mortgage and just pay cash. Today we're rewinding to something even more basic: how to figure out how much home you can afford and how the process of actually getting that mortgage works.

Banks "work on ratios," explains Robbie Gendels, a senior loan officer at NCB. The first ratio is the percentage of your gross income you would be spending on your mortgage payment each month?Gendels' bank generally likes to see payments no higher than 38 percent of a buyer's gross monthly income going toward a mortgage. That ratio?income to mortgage payment?is what mortgage bankers call a front ratio. The back ratio is the ratio to your gross monthly income of not just your mortgage, but your mortgage plus your maintenance or common charges and any other outstanding debt. Banks like to see borrowers with back ratios no higher than 45 percent of their gross monthly income, but good borrowers can often go a bit higher.

The logical next question: how do you know if you're a good borrower? Credit over 700 is best, Gendels says, though borrowers can get qualified at 680 with a higher mortgage rate. Ongoing income, proof of assets for a down payment, and proof that a buyer has about four to six months' worth of expenses in reserve after paying the down payment are other signs of a qualified borrower. If buyers put only 10 percent down, they will have to pay additional mortgage insurance, which serves as protection for a lender against a future default. Borrowers stand to get the best rate with 25 percent down.

These days, everything related to a mortgage needs to be documented. So borrowers should show up with current pay stubs, income and asset statements, a legible copy of ID, and sometimes tax returns. Retired buyers should come with social security and pension documents.

Buyers can also use some money from IRAs toward a down payment without having to pay it back, but Gendels advises checking with an accountant about the current tax laws before doing so. As with all other mortgage-related transactions, any IRA withdrawals would have to be documented. Money withdrawn from 401ks would have to be paid back, and that debt would go into a borrower's back ratio.

Like a buyer, a building, too, needs to be approved for a mortgage. (And sometimes buildings have specific down payment minimums that they'll accept.) If a buyer finds an apartment he or she likes, he can contact a mortgage broker to check if it's on the bank's approved list; if it isn't, the bank can try to get it approved. (Each building on the list is checked annually to make sure its certificate of insurance is current.) Assuming both borrower and building are approved, the rest of the process?a letter of intent, and the bank's work on the appraisal and underwriting of the property?can take about four to six weeks. That's as long as the seller and the co-op board have no issues?fingers crossed.
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