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How Much House Can I Afford?
The old formula that was used to determine how much a borrower could afford was about three times the gross annual income. However, this formula has proven to not always be reliable. It is safer and more realistic to look at the individual budget and figure out how much money there is to spare and what the monthly payments on a new house will be. When figuring out what kind of mortgage payment one can afford, other factors such as taxes maintenance, insurance, and other expenses should be factored. Usually, lenders want borrowers having monthly payments exceeding more than 28% to 44% of the borrower’s monthly income. For those who have excellent credit, the lender may allow the payments to exceed 44%. To aid in this determination, banks have mortgage calculators on their websites to assist in determining the mortgage payment that one can afford. |
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Check Your Credit History
Thoroughly
Lenders like to look at credit histories through a request to credit bureaus to make the borrower’s credit file available. This allows the lender to make a more informed decision regarding loan prequalification. Through the credit report, lenders acquire the borrower’s credit score, also called the FICO score and this information can be acquired from the major credit bureaus Trans Union, Experian, and Equifax. The FICO score represents the statistical summary of data contained within the credit report. It includes bill payment history and the number of outstanding debts in comparison to the borrower’s income. The
higher the borrower’s credit
score, the easier it is to
obtain a loan or to pre-qualify
for a mortgage. If the borrower
routinely pays bills late, then
a lower credit score is
expected. A lower score may
persuade the lender to reject
the application, require a large
down payment, or assess a high
interest rate in order to reduce
the risk they are taking on the
borrower. |
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Mortgage Loan Pre approval
and Loan Prequalification
After basic calculations have been done and a financial statement has been completed, the borrower can ask the lender for a prequalification letter. What the prequalification letter states is that loan approval is likely based on credit history and income. Pre qualifying lets the borrower know exactly how much can be borrowed and how much will be needed for a down payment. However, prequalification may not be sufficient in some situations. The borrower wants to be pre approved because it means that a specific loan amount is guaranteed. It is more binding and it means the lender has already performed a credit check and evaluated the financial situation, rather than rely on the borrowers own statements like what is done in prequalification. Pre approval means the lender will actually loan the money after an appraisal of the property and a purchase contract and title report has been drawn up.
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How Lenders Determine How
Much Mortgage You Qualify For
There are two simple ratios that lenders use to determine how much to pre-approve a borrower for. Here’s how these ratios are calculated: Ratio #1: Total monthly housing costs compared to total monthly income
Ratio #2: Debt to income
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Credit
and Mortgage Loan Qualification
When qualifying for a mortgage, credit plays a very important role. Here are questions a lender will more than likely ask:
The answers to these questions can make a determination as far as the eligibility of a mortgage loan goes.
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Collateral and Mortgage Loan
Qualification
If the loan would exceed the amount the property is worth, the lender will not loan the money. If the appraisal shows the property is worth less than the offer, the terms can sometimes be negotiated with the seller and the real estate agent representing the seller. Sometimes a borrower may even pay the difference between the loan and the sales price if they agree to purchase the home at the price that was originally offered to them. To do such a thing, the borrower needs to have disposable cash and should ask the question of whether or not the property is likely to hold its value. The borrower must also consider the type of loan they qualify for. If the borrower would need to move suddenly and the loan is larger than the value of the property, the loan can be a very difficult thing to pay off. |
