How Much Can I Afford?
What’s the home price I qualify to purchase?
This is usually the first question mortgage professionals are asked by new clients.
Of critical importance when considering mortgage financing: There is sometimes a difference between what a client ***can*** borrow and what they ***should*** borrow.
In other words, what mortgage payment are you comfortable making over the life of your loan?
The Quick Answer:
If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio (DTI) and generally allow for 28-31% of your gross income to be used for the new house payment with up to 43% of your gross income to be used for all consumer related debts combined (house payment; credit card payments; car loans…whatever shows on your credit report).
Sample Mortgage Scenario:
Assume a borrower with gross monthly income of $3,000 and a qualifying factor of 30% Debt-to-Income Ratio:
$3,000 multiplied by .3 (30%) = $900 max monthly mortgage payment
This means that your mortgage payment (Principal, Interest, Taxes, Hazard Insurance) cannot exceed $900 a month.
“Ballparking” a Qualifying Loan Amount:
Simple step: We use a safe average of $7 per month in payment for every $1,000 in purchase price so…
Step 1) $900 a month divided by $7 = $128.50
Step 2) $128.50 multiplied by 1,000 = $128,500 loan amount.
Remember, these are average ratios and guidelines set by most lenders for common mortgage programs.
Keep in mind, while most consumer debts are listed on a credit report, there are some additional monthly liabilities that may contribute to the overall qualifying percentages as well (alimony and child support payments are examples).
Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine the amount of a mortgage for which you qualify.
Other items to consider in your monthly budget:
1. Confirm all debts are taken into account
2. Any private notes or family loans
3. Short-term expenses – medical, auto repairs, travel, emergencies
4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
5. Keep a cushion for savings and financial planning
The Quick Answer:
If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio (DTI) and generally allow for 28-31% of your gross income to be used for the new house payment with up to 43% of your gross income to be used for all consumer related debts combined (house payment; credit card payments; car loans…whatever shows on your credit report).
Sample Mortgage Scenario:
Assume a borrower with gross monthly income of $3,000 and a qualifying factor of 30% Debt-to-Income Ratio:
$3,000 multiplied by .3 (30%) = $900 max monthly mortgage payment
This means that your mortgage payment (Principal, Interest, Taxes, Hazard Insurance) cannot exceed $900 a month.
“Ballparking” a Qualifying Loan Amount:
Simple step: We use a safe average of $7 per month in payment for every $1,000 in purchase price so…
Step 1) $900 a month divided by $7 = $128.50
Step 2) $128.50 multiplied by 1,000 = $128,500 loan amount.
Remember, these are average ratios and guidelines set by most lenders for common mortgage programs.
Keep in mind, while most consumer debts are listed on a credit report, there are some additional monthly liabilities that may contribute to the overall qualifying percentages as well (alimony and child support payments are examples).
Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine the amount of a mortgage for which you qualify.
Other items to consider in your monthly budget:
1. Confirm all debts are taken into account
2. Any private notes or family loans
3. Short-term expenses – medical, auto repairs, travel, emergencies
4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
5. Keep a cushion for savings and financial planning_________________________________
Related Articles – Mortgage Approval Process:
- Basic Mortgage Terms
- Common Documents Required For A Mortgage Pre-Approval
- Top 8 Questions To Ask Your Lender During Application Process
- What’s The Difference Between An Investment Property, Second Home and Primary Residence?
- Seven Items Real Estate Agents Need To Know About Your Mortgage Approval
August 2, 2011 by Andrew Vierra · Leave a Comment
Andrew is a veteran Mortgage Banker & Broker with extensive experience structuring residential home mortgages. Our home loan products include FHA and Conventional financing; I specialize in VA home loans for active-duty and military veterans.
