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How Much Can I Borrow?

Every bank has their own terms for lending, and the consider many things before making a decision. The amount and term of the loan lenders can give is contingent on many factors.

Here is a brief overview of what lenders look at to determine loan approval or disapproval:

Gross Income

Your gross income is what you make prior to taxes.

Furthermore, your gross pay constitutes your entire salary which includes bonuses, Social Security benefits, self-employed earnings, part-time income, child support, and alimony. Knowing your gross income is vital to determine next steps.

Back-End Ratio

This is also in reference to the debt-to-income ratio (DTI). This tool measures your gross income that’s required to pay off your debts. Moreover, debts include things such as credit cards, student loans, child support, and so on. For instance, if you make $5,000 per month and pay off $2,500 of that amount of outstanding debts, your ratio is 50%. In addition to, this means that half of your monthly income goes towards paying off your debts.

In reality, a 50% debt-to-income ratio will not bring your dream him to fruition. Also, lenders don’t want to see a DTI over 36% of your gross income. Moreover, here is a simple formula you use to calculate your maximum monthly debt for this particular ratio. Simply multiply your gross income by 0.36; then divide that number by 12. For example, if you earn $100,000 a year, your monthly debt payment shouldn’t exceed $3,000. Your chance of getting a loan approval is higher when your DTI is low. The lower the better in any case.

Front-end Ratio

This is a percent of your gross monthly income that you use to pay your mortgage on a monthly basis.

Moreover, the four components are known as the PITI. PITI stands for principal, interest, taxes, and insurance.

What about the PMI?

The insurance aspect of the four components refers to the property insurance and PMI (Private Rate Mortgage). One rule to abide by is that the PITI can’t exceed 28% of your gross income. On the contrary, most lenders allow borrowers to exceed 30%; some even 40% (Learn more about how to avoid paying mortgage insurance).

Credit Rating

If the head side of the coin is income, then the tail side of the affordability income is risk.

Most lenders have their own way of determining the risk factor of a homebuyer. The formula lenders use differ from lender to lender, but all of them will most likely use the borrower’s credit score (see how your score is calculated). The lower your credit score, the higher the interest the lender will require you to pay moving forward. The Annual Percentage Rate is the rate you have to pay.

One helpful advice:

If you know for a fact the house you want to buy in the future, starting working on increasing your credit score now. Also, monitor your credit reports too because inaccuracies on credit reports take time to resolve. It’s hurtful to not obtain a loan because of inaccurate information on a credit report. Furthermore, here’s another way to inaccurate information on your credit report. It has to do with…

Down Payment

This is the amount of money you put down that the homeowner pays for the residence.

For example:

If the prospective homebuyer is purchasing a $100,000 home and makes a down payment of 10%, he has to pay $10,000. Moreover, the lender will finance the remaining $90,000. Most lenders request people to put 20% down. In addition to, this will prevent lenders from applying a PMI.

Overall, it looks more appealing to banks and lenders the more you can put down up front.

Closing Costs

Make sure that you include the closing costs in your computations. The amount is between 2 to 5 percent depending on your location.

The good news:

Fannie May and Freddie Mac allow buyers and/or sellers to present 3 percent of the housing price to lower their closing costs. It’s 3 to 6 percent for FHA loans.

In addition to, lenders want to know the duration of the repayment term; not just the amount of the loan. Even though a short-term loan payment option is higher, it’s less expensive in the long run.

Different Types Of Mortgages

For many new homebuyers, the mortgage they choose will affect their budget. Below are the four types of mortgages:

Conventional. These loans are intended for the biggest mortgage companies Fannie Mae and Freddie Mac. These types of loans require higher down payments with a strict underwriting standard than government agency-based mortgages.

The Federal Housing Administration-insured loans are typically for first-time homebuyers and those with that have an inadequate credit history.

The U.S. Department of Veteran Affairs provides this type of loan for those who are active in the military. Retired military personnel can also take advantage of this type of mortgage loan.

USDA. Another term for this type of loan is rural-housing-service-loans This type of loan serves those who live in small towns that don’t have credit facilities.

If your FICO score is 580 or above, obtaining an FHA allows you to have a minimum down payment of 3.5%. If it’s below 580, they require a 10% down payment. Moreover, FHA rules tend to be more lenient than conventional lenders such as Fannie Mae and Freddie Mac. FHA lenders allow at times qualify people who have a 50% DTI or even higher if there’s an advantage for them to do so.

On the flip side, FHA raised it’s mortgage insurance fees. As of result, they are more expensive month-to-month than conventional loans assuming that you have cash readily available for a higher down payment.

VA and USDA are loans with the lowest down payment for qualified buyers. The amount of down payment can be as low as zero and the underwriting guidelines are way easier to comply with.

Pre Approval Process

Getting a loan pre-approval puts you in a great position to get your dream home. Let this be your starting point.

You are in a for the long haul when getting a loan pre-approval from a bank. Moreover, the bank guarantees lending you the money to a certain amount at a specified rate. This contingent on the property appraisal and other requirements. A loan pre-approval positions you receive your new house. In addition to, it’s because the bank sees you as trustworthy.

During the pre-qualification process, lenders typically don’t get into the nitty-gritty of your financial information. Also, they look closely at your credit reports and verify your income. The lender then sends you a letter explaining the decision. Usually, the letter states that they will approve your loan once you make your buying decision.

Remember, you also have to submit the requirement from the lender. Usually, these are:

  • Purchase contract
  • Preliminary title information
  • Appraisal of the property
  • Your financial statements

Overall, just because a lender grants you a loan pre-approval, it doesn’t mean there aren’t any conditions at play. They are only valid 60-90 days. Your representative should be able to give an accurate timeline.