How the lender decides how much I can afford.
How the lender decides how much I can afford. - How does the lender decide the maximum loan amount that I can afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing debts. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. Typically, mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should be no more than 41% of income. The lender also considers your cash available for a down payment and closing costs, credit history, and employment history when determining your maximum loan amount.
The lender decides how much you can afford mainly by calculating your debt to income ratio, also commonly referred to as DTI or DR. Your debt to income ratio is calculated by figuring out what your average monthly income is and what your total monthly debts are and then dividing the two numbers. For example you have:
Auto Loan: $300 per month Monthly Income: $3,000
Credit Card 1: $150 per month
Credit Card 2: $100 per month
Total: $550 per month
Therefore, your DTI would currently be: 3000/550 = 18.33%
Thus, if you were able to go up to a total DTI of around 40% then we could now calculate how much of a home you can afford. $3,000 per month income x 40% = $1,200 total monthly expenses
$1,200 (40% ratio of income allowed)- $550 (current monthly debt) = $650 (maximum mortgage payment allowed)
With this figure of $650, we can go back in and plug in a loan amount, an interest rate, and a loan term and be able to calculate how much of a home loan you can afford. Please contact us if you have any questions about any of the information or need further clarification regarding any of the information contained on this page.
As a borrower you must keep in mind that bills like grocery, telephone and various other monthly and dialy expenses are not figured into the DTI ratio. As a borrower you will need to use common sense and restraint when deciding how much you can afford for a monthly mortgage payment.
Lenders can approve you for a much higher payment than you may be able to practically afford. Don't fall into the trap of choosing a home or cashing out more money than you can afford to pay for comfortably. If you do not have substantial money saved for a "rainy day", it may be prudent to choose a mortgage which allows you to make a smaller payment than the maximum which you can afford. In this way, you can make the maximum payment when you can afford it, but can drop down to a lower payment when necessary to prevent a short term cash crunch from impacting your credit.
How much can I afford - How much house can I afford is a very popular question among homebuyers. The main factor to determine this is your debt to income ratio, or DTI. Different lenders have different requirements and guidelines for what the maximum debt ratio they will allow. Most non-conforming, or subprime, lenders have maximum debt to income ratio limits around 50-55%. Some lenders have lower limits and some lenders have higher limits and through the use of some automated underwriting engines you may even be able to get approved with a DTI of 65%. How high your LTV is, the amount of money your borrowing compared to the purchase price or value of the home, can also affect DTI guidelines. The less money you put down usually the lower DTI that is allowed.
A debt to income ratio of 41% is considered by many mortgage professionals and lenders as a comfortable and safe level. Although this number is not the standard by which all borrowers are gauged it is a great benchmark number to strive for when you purchase a home. Nothing can be more of a let down then to be cash strapped due to a house payment that is to high.
Getting approved beforehand is of the utmost importance so that you can find out how much home you can afford. There are many different variables that will affect how much home you can afford such as how much the property taxes are of the property that you find, whether the house you purchase has an association with and association fee, and how much you end up needing to pay for homeowners insurance. All of these charges will affect your debt to income ratios.
There are other loan programs that do not calculate ratios, called "no ratio" loans. These are very popular for those that may not be able to document all their income. Stated and no ratio loans are very popular programs. Some people although on paper can't afford x amount, in reality they can truly afford it.
Depending on which loan program you choose will change the amount you will be approved for. Loans that have interest only periods will reduce your monthly payment, therefore allowing you the option of purchasing a more expensive home.
Remember that when deciding how much you can afford, you are the only one who truly knows that. The mortgage professional can help you out, and even place a number on it, but you must be comfortable with the payments. Also, keep in mind that there are several other monthly payments that you will be making that are not included in your debt ratio (in most instances), such as your cell phone bill, cable, and groceries to name a few.
Remember only you know what you are comfortable spending. Do not allow yourself to be talked into spending more then that limit by family members, friends or a real estate agent.
How to afford a mortgage - The main problem in buying a home today is not income or credit requirements but finding having the funds available to cover the down payment and closing costs. While a traditional conventional loan requires a 20 percent down payment the are other options.
For example, funds for the purchase of a home can include a gift from a relative or even retirement funds. There are also many other ways to get a low down payment loan.
You can always have the seller contribute money to pay your closing costs. This is called a seller contribution. Ask your mortgage broker how much of a seller contribution is allowed per the guidelines of the home loan program that you are obtaining a mortgage for. This will help you to afford a mortgage when money is tight.
Another way to afford a home is to use an FHA or VA loan. Many real estate agents may try to steer buyer away from these types of loan because they feel that there is too much paperwork involved with these types of loans. However, with new changes to FHA guidelines these types of mortgages are now much easier to process, especially if you are dealing with an experienced loan officer.
Having a down payment for your mortgage is really a thing of the past. Today there are many 100% financing programs available that will allow you to get into a new home with little to no money out of pocket.
The key to buying a home with the minimum up front funds is to have the seller pay the closing costs. Depending on the loan program you choose, the seller may be able to absorb all of you closing costs.
When having the seller pay your closing costs, the seller will usually increase the price of the home beyond what they are willing to accept. That way it is really the buyer who is paying the closing costs, but is is being included in the purchase price of the home.
If you think that you will be buying a home within the next year, now is the time to start saving. Try putting yourself on a budget, and saving a little bit of money every month. Nobody likes to be on a budget, but if it gets you into a new home then it will be well worth it.
It is possible to borrow your down payment from your retirement account. Usually this interest rate is very good. However, the payment will be figured into your debt-to-income ratio. Also, you can usually only have one loan at a time from your retirement account, so you need to be sure you borrow all that you need the first time. Discuss this option with your mortgage professional.
Deciding how much house you can afford is a personal decision. Many factors come into play. How much can I borrow? How much can I put toward my down payment? What size monthly payment can I afford?
It's up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month. Along with your mortgage payment, don't forget related insurance, taxes, homeowner association dues and any other costs rolled into the mortgage payment.
When determining what size monthly payment you can afford, you will want to consider what other monthly expenses you have. Tangible expenses such as car payments, day care and utility bills, all play a role in how large a monthly payment you can afford.
Budget and track what you're spending. Check your credit to determine if there are any errors. Pay down debt. Get to know the housing market and terminology. Also, find out which area you would like to buy in so that you can get a feel and not be rushed in. Talk to a retirement planner about using a 401k plan for a down payment. Make sure it's in your best interest for the long haul. Above all, take your time and understand what you are getting into. Owning a home is a major responsibility that should not be taken lightly.
Another good way to determine if you can afford a mortgage is to determine how much more your housing expenses would be with the new mortgage. Don't forget about utility payments, taxes and insurance.
Once you have determined an amount, put that amount in a savings account every month. This is a good way to see if you can really live with the added expense.
At the end of the six months, you can use the money for a down payment or closing costs. Or set it aside as an emergency fund.