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.
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.
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!
Do you need help making an effective financial decision? Call or text me at (650) 222-0386, or e-mail me.
Opes Advisors is licensed by the CA Department of Business Oversight 4150089, CA Bureau of Real Estate 01458652, Oregon ML -4902, Washington CL-1178435 and NMLS 235584. Equal Opportunity Lender. Opes Advisors is a registered investment advisor with the Securities and Exchange Commission (SEC). ©2014 Opes Advisors, Inc. All rights reserved.