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City of Lincoln Urban Development Department
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Buying a home is one of the most important decisions you will make in your lifetime. Take the time to learn as much about it as possible -- from your public library, from the internet and from the experiences of others. Here are some of the questions that you need to ask.
Before you go shopping for a home, you need to know what you can afford. How much can you afford to pay each month for your housing costs? Fortunately, there's a pretty simple formula for coming up with this number. It's the Federal Housing Administration (FHA) formula that many mortgage lenders use. The FHA has found that most people can afford to budget 29% of their gross monthly income to housing expenses (mortgage payments, taxes, insurance), depending on their total debt.
The following chart will help you determine how much you can spend on total housing costs each month. Find your annual income, or a figure close to it, in the column at the left. Then read across to find how much your monthly gross income is, and finally, what equals 29% of that amount. This is approximately how much you can spend on total housing costs each month.
| Annual Gross Income | Monthly Gross Income | 29% of Monthly Gross |
|---|---|---|
| $25,000 | 2,083 | 604 |
| 30,000 | 2,500 | 725 |
| 35,000 | 2,917 | 846 |
| 40,000 | 3,333 | 967 |
| 45,000 | 3,750 | 1,088 |
| 50,000 | 4,167 | 1,208 |
| 60,000 | 5,000 | 1,450 |
| 70,000 | 5,833 | 1,692 |
| 80,000 | 6,667 | 1,933 |
So if 29% of your monthly gross income is, say, $604, that doesn't mean you can pay a $604-per-month mortgage. You need to look at a mortgage somewhat below that, to leave room for taxes and insurance. Be sure to ask your lender how much your total costs will be.
Finding the Right Home for You
Before you begin looking for a home, try to decide in advance exactly what you want. It's a good idea to actually write down your wishes, and share the list with your real estate agent, if you have chosen one. Almost any home you look at will have room for improvement. But the more that needs to be done to a home, the less you will probably have to pay for it. It's always a good idea to get a professional inspection before making an offer on a home. If you do find a home you like that needs some work, make sure you are qualified to do the repairs yourself, or can afford to hire a contractor. You might even want to consider including financing the cost of repairs along with your mortgage loan. There are government home loan options that will allow you to do exactly that.
After you have found the home you want to buy, you should call various lenders listed under "Mortgages" in the Yellow Pages to find the lender offering the best terms. It pays to comparison shop and check on different programs offered by each lender. The costs associated with a loan can vary significantly. The most important factors to consider in comparing loans are:
Interest rates fluctuate daily, depending on the conditions in the mortgage market. It is always a good idea to check with several mortgage lenders to make sure you are getting the best interest rate available.
The annual percentage rate is calculated by adding the interest rate, the discount points, the initial service charge, the premium paid to insure the mortgage, and certain other charges collected by the lender. A longer mortgage term will lower your monthly payment, but it will increase the total amount of interest you pay. For example, if you borrow $50,000 with an interest rate of 10%, your payment to principal and interest will be:
| Monthly Payment | Term of Loan (years) | Total Payment |
|---|---|---|
| $537.50 | 15 | $96,750 |
| $439.00 | 30 | $158,000 |
Taking Advantage of Home Buyer Training
Home buyer training classes are available in Lincoln through Neighborhoods, Inc. In addition, banks often offer home buyer training as well. This training is available at no cost to you. It can help you learn what skills you need and how to use those skills to achieve your dream of owning a home. Neighborhoods, Inc. Home Buyer Training is available to all Lincoln residents who are trying to purchase their first home.
Home Buyer Training sessions help you learn how to:
Offered through NeighborWorks®Lincoln, a non-profit organization located at 2121 N. 27th St. in Lincoln, Home Buyer Training provides opportunities for group interaction and hands-on experience. Trained housing experts assist you during four separate training sessions. In addition to certified staff, community professionals help you prepare to become a homeowner. Home Buyer Training is FREE and you are under no obligation to purchase a home. The Home Buyer Training program offered through NeighborWorks®Lincoln is certified by the Federal Housing Administration. Because of this special certification, home buyers who complete the training and then purchase a home using an FHA-insured loan, receive a discount off their mortgage insurance premium. To find out more about this valuable training, visit the NeighborWorks®Lincoln Web site or call (402) 477-7181.
Additional home buying seminars and individualized home buyer counseling are also available from a variety of lenders and other organizations. For more information contact your local lending institution.
Urban Development
Community Development Division
Housing and Real Estate Division