Background To A Personal Loan Form

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A loan agreement is a contract entered into between which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending. Loan agreements are usually in written form, but there is no legal reason why a loan agreement cannot be a purely oral contract (although in some countries this may be limited by the Statute of frauds or equivalent legislation).

Loan agreements are usually characterised either of two different ways: by the type of lender, or by the type of facility. Categorising loan agreements by lender usually simply sub-divides loans into:

bilateral loans
syndicated loans

Categorising loan agreements by type of facility, usually results in two primary categories:

Term loans, which are repaid in set instalments over the term, or revolving loans (or overdrafts) where up to a maximum amount can be withdrawn at any time, and interest is paid from month to month on the drawn amount.

Within these two categories though, there are various subdivisions such as interest-only loans, and balloon payment loans. It is also possible to subcategorise on whether the loan is a secured loan or an unsecured loan, and whether the rate of interest is fixed or floating.

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Whether you’re a first-time buyer looking for the perfect starter house, or a seasoned pro trading up to your waterfront dream home, you are probably asking the same questions: Can I afford this? And is this the right move at the right time?

Of course, you can use a mortgage calculator and ask the experts — lenders, agents, and mom — but the reality is that you are the only one who truly knows whether you can afford to buy right now. And, painful as it is, what you need to start with is a detailed expense breakdown. Analyze what you spend — at least get a full month’s snapshot. You’ll see where you may have wiggle room in your budget and what you can afford for housing. (Be sure to count all those little incidental expenses like dry cleaning and yes, those mid-afternoon Starbucks lattes count in the budget, too!)

Sample Budget

This sample budget belongs to a single, 35-year-old woman making $68,000 per year, renting a two-bedroom apartment. Her monthly pre-tax income is $5,667.

Monthly expenses:

Rent
$1,600
Car payment
$225
Credit card payments
$200
Car insurance
$75
Groceries
$400
Health insurance/renters insurance
$208
Electricity
$40
Natural gas
$70
Cell phone
$49
Home phone + Internet access
$72
Cable TV
$50
Gas, dining, clothes, dry cleaning, gifts, other expenses
$800
Memberships (gym, professional, etc.)
$100
Water/sewer/garbage
$0
Property tax/homeowners insurance/condo fees
$0
Alarm company
$0
Lawn
$0
Total
$3,889
The sample budget may not look like your expense snapshot, but by adding and subtracting your personal budget items with an eye toward true monthly out-of-pocket totals, you get a pretty good picture. Now, add in all of the expenses where the zeros are as well as the increased cost of your monthly mortgage payment (formerly rent). Maintenance costs like condo fees, utilities, the leaky bathroom sink that defies a simple trip to Home Depot to fix, property taxes, closing costs, and furniture for your new home all add to the bottom line.

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Debt-to-Income Ratios

If you figure out that you can afford your projected budget, chances are you’ll qualify for a mortgage in your range. Lenders will determine how much loan you can afford by using something called your debt-to-income ratio, which is the ratio of a borrower’s total debt as a percentage of their total gross income. Basically, they will look at what’s left in your budget after your monthly bills are paid. These include credit card payments, car payments, child support, etc.

Housing ratio (or “front-end ratio”): Lenders want your total mortgage debt (called PITI — an acronym for Principal, Interest, Taxes, and Insurance) and condo fees to be no more than 30 percent of your gross monthly income; 28 percent is standard.
Overall debt ratio (or “back-end ratio”): These are revolving monthly payments, such as credit card, car lease, or loan payments, student loans, child support, alimony, monthly utilities. (They do not include those lattes, but you might want to plug in your lifestyle expenses for your own sake.) The ratio should not be more than 36 percent.
Debt-to-income ratio standards differ from lender to lender, and vary based on your loan program, but most lenders will give more weight to your credit history as a factor in determining your particular situation. Here is a typical ratio for a first-time buyer:

Monthly gross household income:
$5,700
Mortgage debt ratio:
28% $1,596.0
Expenses and overall debt:
36% $2,052.0
The mortgage debt of $1,596 is right in line with the current monthly rent payment in the example above. As long as the monthly debt obligations and household expenses are no higher than $2,000-2,300, this borrower should have no problem qualifying.

If your credit is stellar, you will be rewarded. Lenders may stretch these ratios to 38/45, allowing you to purchase more home and take advantage of more lending programs. And if you are a first-time home-buyer applying for an FHA or VA loan, you may also be able to qualify with a higher back-end ratio — up to 41 percent of your monthly gross income — and get approved for these federally-insured loans.

How It Works

So, back to the question: How much home can I afford?

Keeping in mind the variables on debt-to-income ratios and the many lending programs available, here is a sample breakdown for a mid-range home.

Monthly gross household income (pre-tax):
$7,000
Mortgage debt ratio
28% $1,960
Home price
$350,000
20% down payment
$70,000
Mortgage
$280,000
Interest rate on 30-year mortgage
6.33%
Mortgage payment (principle and interest)
$1,739
Here is an example of a lower price-range home, purchased with the same loan terms and interest rate:

Monthly gross household income (pre-tax):
$3,600
Mortgage debt ratio
28% $1,008
Home price
150,000
10% down payment
15,000
Mortgage
135,000
Interest rate on 30-year mortgage
6.33%
Mortgage payment (P&I)
$838
And the Other Costs…

In addition to the monthly mortgage payment, remember to factor in the added costs of home purchase and ownership. Since this buyer above did not put 20 percent down, he will need to add mortgage insurance, also known as PMI, to his monthly payment. PMI protects lenders against losses that can occur when a borrower defaults on a loan, and is required for borrowers with a down payment of less than 20 percent of the purchase price. Buyers also incur closing costs of 2.5 to 3 percent of the total loan amount. This covers the cost of title searches, appraisals, legal fees, etc.

So what’s left to apply to the down payment? Using the example above, our first-time buyer has $15,000 for the down payment on a $150,000 home, and the closing costs may come to $4,500. The mortgage total just increased to $139,500. Over the 30-year loan period, this brings the mortgage payment to approximately $866 per month. If your head is not already spinning, now tack on mortgage insurance (fees vary based on the loan), homeowners’ taxes and condo fees (if applicable), bringing the total monthly payment to approximately $1,038. The good news is this is still well in the range of the acceptable debt ratio.

Keep Some Money in Reserve

Many buyers invest every red cent they have into their new purchase, but it’s a good idea to keep some emergency cash, or “leaky faucet money,” aside in the event of emergency repairs or a job loss. So don’t completely raid your savings; with home ownership, expect the unexpected.

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