How Much Mortgage Do I Qualify For?
Generally, How Much Mortgage Do I Qualify For is the first question that homebuyers will ask of a mortgage professional. Prospective homebuyers should understand that there can be a distinct difference between the loan amount they pre-qualify for and the loan amount they should possibly accept. In other words, what is the range in loan amount will provide a comfortable range in monthly payment amount as well?
A Fast Answer: Using a rule-of-thumb approach, lenders will calculate your Debt-to-Income Ratio (DTI) first. They will allow for 28-31% of your gross income to be used for the new housing payment. The sum of all consumer monthly payments (auto loan, student loan, monthly minimum credit card payments, etc.) plus the new housing payment cannot generally exceed 43% to 45% of your gross monthly income.
Sample Mortgage Scenario: Let’s use a gross monthly income figure of $11,900, and a qualifying factor of 30% DTI.
$11,900 multiplied by 30% = $3,570.00 maximum monthly mortgage payment.
This means that your mortgage payment (Principal, Interest, Taxes, and Insurance) cannot exceed $3,570.00 per month.
“Rough Estimating” a Qualifying Loan Amount: It is safe to use an average of $7.00 per month in payment for every $1000 in purchase price so…
Step 1) $3,570.00 a month divided by $7.00 = $510.00
Step 2) $510.00 multiplied by 1000 = $510,000.00 maximum loan amount.
Remember, these are average ratios and guidelines used by many lenders for common mortgage programs. A lender’s use of automated underwriting systems may expand your allowable debt-to-income ratio due to good credit, low DTI, and financial reserves. So, when asking How Much Mortgage Do I Qualify For it may be more important to consider your “payment comfort zone”.
Mortgage Planning Guidance
An informative initial exercise would be to plug different loan sizes into a good mortgage calculator to discover the corresponding monthly payment amounts. Here is a great link that will be helpful to that cause: Mortgage Payment Calculator
Next, by contacting a mortgage advisor, you can ask questions and accurately obtain a price and payment range that matches your affordability goals. You’ll obtain my personal and professional assistance using the Purchase Assistant link within the EquiLane Lending website: Purchase Assistant Link
Budgeting Items to Consider Before a Home Purchase
Most consumer debts are listed on a credit report. However, there can be additional monthly liabilities that may contribute to the overall qualifying percentages as well. Regardless of your personal income and credit profile, it is important to consider your overall budget when trying to determine the mortgage payment you can accept.
Other items to consider in your monthly budget:
- Confirm that all debts are taken into account.
- Are there any private notes outstanding?
- Consider short-term expenses – medical, auto repairs, travel, emergencies.
- Plan on additional expenses such as water, electric, maintenance, HOA fees, etc. for the home.
- Keep a financial asset cushion in reserve if possible.
Mortgage Budgeting Benefit
Mortgage interest and property taxes will be tax deductible for a majority of homeowners on their federal tax returns. Consequently, this fact will help most homeowners keep more of their hard earned income and offset the costs of ownership.
Post written by Bob Turgeon. Connect with Bob on his website
Mortgage Planning Specialist
Lic # 100010429 NMLS # 258186
3190 S. Wadsworth Blvd Ste 200, Lakewood, CO 80227
CoAMP, Colorado Association of Mortgage Professionals, BOD 2015
Named 5280 Magazine’s 2014 FIVE-STAR Mortgage Professional