Before you can really begin looking for a home to purchase, it is important to determine how much you will be able to borrow. This will prevent you from spending time looking at homes that do not fit into your mortgage budget. Below we have listed the items bankers look at in determining the amount of funds they will loan you for a home purchase.
- Monthly Income The first thing a bank will want to know in determining your loan approval amount is how much income you receive a month. They will want to see paycheck stubs for the last month or two to verify the average wages you are receiving. They will also want to know if you have any additional income sources that can be added to your annual income. The higher your annual income the greater potential you have for being qualified for the loan amount you are needing to purchase a home. If you have only been with your employer a short time, the bank may rely more heavily upon your last income tax return to verify income potential. This can be a positive or negative situation depending on your individual circumstances.
- Monthly housing expenses After determining your income potential, a bank will begin to calculate the amount of expenses that will need to be paid out of your income. When buying a home, the bank knows that you will have some expenses that relate directly to home ownership. Home insurance and real estate taxes are two of those expenses that every home owner has. These of course will vary depending on the home you purchase but most banks can estimate these fairly closely by simply knowing the general locale and price range you are looking for in a home. Some home’s have additional expenses as well. A condominium and some other association type housing also have monthly association fees to be considered for upkeep of association owned property. Another potential addition to your housing expense is mortgage insurance. If you will be borrowing more than 80% of the value of the home, most lenders will require that you have mortgage insurance as well to protect them against the possibility of a default on the loan.
- Other monthly expenses After considering the expenses directly related to the home purchase, the bank will want to know what other financial obligations you have. You will be asked to provide them will a list of any loans, credit cards and charge accounts that you have. With this list they will want to know the total balance due and the minimum monthly payment. This will include things like car loans, student loans, major credit cards and department store credit cards. These expenses will be subtracted from income along with the estimated housing expenses listed in number two to determine your monthly ‘disposable income’. This is considered the amount of money you will have available for your house payment and other everyday living expenses such as food, fuel and utilities.
- Ratio of debt to income Once the bank has determined the income and expense amounts that make up your personal financial picture, they will compare the ratio of your total monthly payments on debt to your total monthly income. When you take you take into consideration all your housing expense (including a mortgage payment) and add that to your other monthly debt payments, the banks generally prefer to see a ratio of no more than 36% of your gross income being committed to your total debt. In other words if your total gross income is $4,000.00 a month, they would like your total monthly debt (including the mortgage payment) to be no more than $1,440.00. Some lenders may allow a slightly higher ratio but that seems to be a fairly recognized industry standard.
- Calculating your loan payment To calculate the amount of your potential mortgage payment, you can use a mortgage payment calculator. You can find these on most of the larger mortgage lender’s websites. They will require you to enter in the amount you will be borrowing, the term of the mortgage (how many years) and the interest rate. With these amounts entered, it will be able to calculate your monthly mortgage payment.
To make it even easier for you, there are several sites online that have calculators that will work through all these scenarios for you. www.mortgage-calc.com is one of those sites. It walks you through the process of determining your debt to income ratio and then follows that with a calculation of your mortgage payment. There is no need to go into a banker unprepared. With a little research ahead of time you can know for yourself what size of mortgage you qualify for.