Factors That Affect Mortgage Amount
Banks take many things into account in regards to lending. In other words, there are many factors that lenders look at to determine loan amounts and terms.
Below is a general overview of what lenders look for so you can know whether or not you can get a loan and get an estimate of how much you may qualify for.
This is the amount of money you have before you pay income taxes.
Alimony, child support, security benefits, self-employed earnings, part-time income, and total salary plus bonuses compromise your gross income. Also, your gross income is important in determining your next item.
The percentage of your gross income is the front-end ratio that you can use as a reference to paying your monthly mortgage.
The four components (known as PITI) of a mortgage payment are principal, interest, taxes, and insurance.
What about PMI?
The insurance aspect is in reference to the property insurance and private mortgage insurance (PMI). Moreover, one thing to note is that the PITI shouldn’t exceed 28% of your gross income. On the contrary, lenders do allow borrowers to go over 30%; some take it as high as 40% (Learn how to avoid paying for mortgage insurance).
Debt To Ratio (DTI)
Also known as back-end ratio, this ratio analyzes the percentage of your gross income that is mandatory for paying off debts. Credit cards, loans (auto, student, etc.), child support, etc. are all forms of debt. For instance, your debt ratio is 50% if you earn $5,000 a month but pay off $2,500 per month for your outstanding debts. In other words, half of your income goes towards paying off debt.
The downfall is that you’re positioning yourself to get the house of your dreams if 50% percent of your income goes towards paying off debts. Lenders prefer to see a DTI of no more than 36% of your gross income. Let’s take a look at the formula of how you can calculate your monthly debt according to this ratio. All you have to do is multiply your gross income by 0.36 and then divide it by 12.
Here’s an example: if you earn $100,000 per year, your debt payment (paid monthly) should not go past $3,000. If you have a low back-end ratio, you have a higher chance to qualify for a loan.
A down payment is a monetary amount (in cash or other liquid assets) an individual pays upfront to secure their home.
If you only a 10% down on a house that costs $100,000, you have to pay $10,000 upfront. Afterward, the lender will take care of the remaining $90,000. Typically, most lenders require 20% down (which exempts the borrowing from having to get private mortgage insurance) but some will settle for less.
Remember, the more you are able to put down, the better you look in the eyes of the bankers.
Also, don’t forget to input the closing costs into your calculations. It can range from 2 to 5 percent of the purchase price, depending on the location.
Besides the loan amount, lenders also want to see the duration of the repayment term. Even though a short-term mortgage is an expensive cost upfront, due to a higher payment per month, it can be less expensive as a whole.
If the main side of the coin is income, then the other side is risk.
Lenders typically have their own formula when calculating the risk of someone who wants to buy a home. Furthermore, most lenders may have their own way of calculating, but they all analyze a borrower’s credit score. (Learn how to calculate your credit score). The lower your credit score, the higher the interest. Another term lender use for this is called the APR (Annual Percentage Rate) of a loan.
One helpful advice:
If you know the kind of house you want to buy, start improving your credit score now. Also, don’t forget to analyze and monitor your credit reports as well. Keep in mind that it will take time to correct inaccuracies on your credit report if you have them. It’s a sad thing to not qualify for a home loan because of inaccurate information on your credit report. On another note, here’s information on how you can bypass negative entries on your credit report: it relates to…
What Percentage of Your Home Can You Afford For Mortgage Payments?
Even though lenders follow their own guidelines for lending, they typically follow the same key benchmarks. Here are the following metrics lenders use to determine your loan issue:
- Your monthly housing costs as a percent of your gross income.
- Your monthly housing costs and other debt repayments of your gross income.
Overall, your housing costs on a monthly basis should not exceed 28% of your total gross income. According to metrics, an adult who’s single with a $50,000 salary or a gross pay of $4,167 per month has the ability to pay housing costs up to $1,167 per month. Moreover, this also includes payments towards the principal, interest, real estate taxes, and homeowners insurance.
This method is pretty straightforward. On the other hand, people such as young adults who are looking to buy their first home have other debts to pay for such as credit cards, student loans, car payments, etc.
This is one of the reasons why most lenders have to determine affordability by analyzing other debt repayments that are in addition to your monthly housing costs and income. The ratio lenders like to see for housing costs per month and other debts are on average 36% or less.