The Mechanics Of Pre-Qualifying Yourself For A Mortgage

Would you like to figure out how much of a mortgage you can qualify for? In order to find out how much of a loan you can be approved for, you need to know the mechanics of how a lender calculates what are called debt-to-income ratios.

There are two debt-to-income ratios: the housing expense ratio and the total expense ratio. Ratios

The housing expense ratio is made up of the monthly payments you will be making related to your home expenses.

These payments are made up of, but not limited to (there may be local expenses not listed here):

  • qualifying mortgage payment, or payments (if secondary financing utilized)
  • property tax
  • homeowner's insurance
  • mortgage insurance (if applicable)
  • homeowner's association dues (if applicable)
  • flood insurance (if applicable)

The qualifying mortgage payment may not be the same as the actual mortgage payment. Check with your favorite lender to find out the qualifying payment for the type of loan you are interested in obtaining.

The total housing expense is divided by your gross monthly income to determine your housing expense ratio. Again, call your lender to find out what the maximum percentage is for this ratio.

The next ratio is the total expense ratio. This ratio is made up of your housing expenses plus your other monthly obligations.

These other monthly obligations are made up of, but not limited to:

  • car loan or lease payment
  • revolving debt (credit card) payment
  • installment loan (student loan, for example) payment
  • alimony and/or child support payment
  • negative cash flow from rental property

These monthly payments are added to your housing expense in order to calculate your total monthly expenses. Expenses

Yout total monthly expenses are than divided by your gross monthly income to determine your total expense ratio.

What do you do with this number, the total expense ratio? Again, consult with your lender to find out what the maximum percentage is.

More importantly, decide whether or not you are comfortable with your ratios. Just because you qualify does not mean you should maximize your debt ratios!

As you become more committed to starting the home buying process, contact a mortgage professional to drill down on the details regarding your income and debts.

Knowing the mechanics of getting qualified for a mortgage is different than what numbers to actually use for your income and debts. There are many details that determine what these numbers are. 

My best advice is to provide all the documents requested upfront so that your loan officer can clearly determine how much you can qualify for!




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Phil Caulfield NMLS #386911 APMC #1850 has been helping people obtain mortgages since 1985. The views, articles, postings, and information listed at this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.

Comment balloon 0 commentsPhil Caulfield • January 07 2014 11:29AM