A good measure of loan Affordability, but one not always used today, is to look at the percent of income required to afford the loan payment or Loan-to-Income Ratio.  A past standard for PITI of 28% became unrealistic as inflation took hold of housing prices in the 1980’s and increased it to 30%.  Now, debt-to-income is a universal measure.   The first-time and modest income buyer should consider what portion of income will yield a comfortable level of discretionary income to allow for new or unexpected post-purchase expenses such as furniture, new car, home improvements, a first or additional child, and so forth.

Homebuyer loans are long-term contracts.  Borrowers receives large sums of money to pay sellers for legal title and rights of ownership as a new owner.  Monthly payments to the lender along with obligations to pay real estate taxes, homeowner insurance, and sometimes mortgage or other insurance are held in the mortgage contract and remain until they are paid-in-full.  These contracts are enforced strictly and cannot be ignored if borrower faces financial problems.  Communication with your lender before falling behind can help to avert the worst case scenario of losing your home.

The Lender’s risks are that the purchase value of the real estate value will remain sound: that the borrowers will remain reliable in keeping up payments and that they also will maintain the condition of their properties over many years.  These risks are measured in terms of percentages: Loan-to-Income, Debt-to-Income, and Loan-to-Value.  Their gain is the total interest on the borrowed sum.

The Borrower’s risk the loss of most of the money that has been paid to date if they default on their loan and all the value of what had been their home.

Mortgage applications are not free.  There are costs associated for the application, the credit report, and the home value appraisal.  If the loan is rejected, that money is lost.  It is critical to be aware of what factors a lender will be using to judge your application before starting the process.  Equally important is to understand the short and long term risks of home buying and what the term affordability really means.

Mortgage Opportunities for First-time and Modest-income Buyers

First time and lower-income borrowers may not be able to afford conventional mortgage loans.  In this case, lower interest, longer term, and small or no down payment mortgages are available from most lenders.  The following are links to home buyer programs that are widely available from many private lenders.

Federal Housing Administration (FHA)

United States Department of Agriculture (USDA)

United States Department of Veterans Affairs (VA)

Local Banks Community Reinvestment Act (CRA) initiatives

State of New York Mortgage Agency (SONYMA)