When it comes to purchasing a home, one of the first questions you need to ask yourself is How much can I afford? This will also be question that will be on the mind of your mortgage lender. They will use a series of calculations and formulas to come up with a figure, but you can do the same thing for yourself before you even start shopping around. Of course you could do it the easy way and log online to one of the numerous mortgage company websites that offer a pre-qualification calculator, or you could take a little bit of your time and understand what goes into the mortgage lender figuring out the magical number.
This article will give you a better idea of what types of home will be in your price range. Figuring out just how much home you can afford involves numbers and ratios, but it should also involve understanding your own personal preferences and financial behavior. For example, a lender may qualify you for a large amount, but in order to make the monthly payments you would have to cut back on things like weekend movies, dinning out or any other expenses you might have that relate to entertainment. Only you can decide whether or not the bigger house will be worth the lifestyle sacrifices you may have to make.
Once you have determined your own mortgage preferences, you need to look at your finances and resources from the perspective of a potential mortgage lender to figure out how much of a loan you can afford. Lenders will lend you an amount of money based on how sure they are that you have the means and habits necessary to pay them back. In order to determine how much of a potential default “Foreclosure” risk you are, they will look at several key factors: your income, your credit history, and your down payment.
Of course, mortgage loans are safer loans than most others for lenders, since you are pledging the home and property as collateral for the loan. If you should default on the mortgage, the lender will have the legal right to repossess the home and try to sell it to recover the amount of the money lent to you. Still, no lender really wants to have to go through that foreclosure process as it takes plenty of time and lots of money for lawyer’s fees and paperwork. They would much rather go into the loan feeling confident that you will repay the loan. So, a lender will start by looking at your sources of income. This will include not only your yearly salary, but any bonuses or commissions you receive. It will also include a list of your assets the balances of your savings and investment accounts, and even the value of any cars or boats you own. This helps your lender to see what sources of wealth you could turn to repay your mortgage in the event of a job loss or other crisis.
Lenders use a ratio called the DTI “debt to income ratio” to determine if your income is sufficient for a certain loan amount. While standards vary by lender and have become more stringent since the mortgage crisis of 2008, the general rule is the 28/41 ratio. The front end ratio, the 28, means that lenders like to see that your monthly obligation/debts, excluding your housing payment, do not exceed 28 percent of your monthly income. So for example, if you make $5,000 per month, your monthly payments (auto loans, student loans, credit card bills, etc.) should not be more than $1,400 (28 percent of $5,000.) The back end ratio, the 41, means that your total monthly payments, including the potential mortgage payment, should not exceed 41 percent of your monthly income. So using the same example above, 41 percent of your income would be $2050. If you have monthly debts in the amount of $700, you would have $1350 left over for a monthly mortgage payment.
Lenders will also use your credit history as a means of determining whether or not to lend to you and how much interest to charge you. Obviously, the better your credit score the better the interest rate will be on your loan & could even mean a better loan product. If you have time and your score is not as high as you’d like it to be, start working now to improve it before you apply for a mortgage. Use our previous post as a guideline on things you can do to improve your credit.
How much of a down payment you plan to make could also have an effect on how much you can afford or how much a lender will loan you. The bigger your down payment, the less risk the lender feels like he is taking on and you will probably receive a better rate, and of course you will pay less interest over time.
Keep in mind if all this seems a little confusing, you can easily just log onto one of the numerous mortgage company websites that offer a pre-qualification mortgage calculators or other helpful calculators that will figure it all out for you. The main thing you should be trying to figure out is to get a rough idea of your mortgage limits before you start shopping for a new home loan. Doing so will make the house hunting process less stressful for you and your family.
About the Author:
ZFG Mortgage headquarter in Tulsa, Oklahoma is the #1 rated mortgage lender in the state of Oklahoma. At ZFG Mortgage we pride our selves in offering the lowest mortgage rates at the lowest closing costs. We have & A+ Rated rating with the Better Business Bureau & have been nominated & won numerous awards like the BBB Torch awards and the BBB Honor Roll for NO complaints in the last 3 years! If you are need of a Home loan in Oklahoma, then go with the lender you can trust. Apply online or call for Free Rate quote or Pre-Approval.
6670 Lewis Ave # 200
Tulsa, OK 74136
Toll Free: 1-877-205-7266