How Much Do I Qualify For?
In order to start shopping for a home with confidence, it is very important to get pre-qualified. Here are the steps to do so: Read More. Whether or not you have spoken to a lender yet, you may be wondering how your purchasing power is determined. Well, I've outlined that for you here!
You may have already read the last blog post regarding the Four C’s in qualifying for a mortgage. This includes Capacity, Capital, Collateral, and Credit. Let’s assume you have the minimum required credit score for the program you wish to use, as well as a down payment ready for use. The main way lenders determine how much you qualify for is by calculating your debt-to-income ratio (DTI).
This ratio helps lenders measure your ability to repay. It measures how much debt you have compared to your income. The lower this ratio, the more comfortable the mortgage payment should feel for you. Each program has different requirement on how high this ratio can go. For general qualification purposes, let’s use the standard 43% maximum debt-to-income ratio.
Debt-to-Income Ratio Calculation:
DTI = all monthly debt including proposed housing payment / gross monthly income
This includes anything we would see as minimum monthly payments as per your credit report along with any alimony or child support. Other examples of debt include minimum credit card payment, car loan payment, student loan payment, other lines of credit, as well as your proposed housing payment.
Gross Monthly Income
This is your monthly income before taxes are taken out. Keep in mind, not all income can be used to qualify. It will depend on your employment history and employment type which is why it is important that a lender does a thorough pre-qualification before you start house hunting. Generally speaking, you will need a two year history of the income before it can be used to qualify, however there are many exceptions to this.
Let’s say a potential home buyer makes $84,000 salary each year. Her credit card bills leave her with a $75/mo minimum payment, a $330/mo car loan, and a $200/mo alimony payment.
The $84k salary means her gross monthly income is $7,000. Her total monthly debt is $605.
($7000 * 43%) - $605 = $2,405.
This means the potential home buyer can hold a mortgage payment of $2,405/mo to keep her DTI at 43%. If she found a home where the mortgage payment came out to $2,000 per month, that would make her Debt to income ratio 37.215%.
~ ($2000 + $605) / $7,000 = 37.215% ~
Let’s now clear up a common misconception. The purchase price of a property impacts affordability, however, it does not determine affordability. Every property and every purchase price will have a unique monthly payment so it is impossible to set a blanket pre-qualification amount. Instead, we set a price range to stay in with an understanding of what that should mean, approximately, on a monthly basis. If you are looking at condos for example, the condo fees are going to directly impact how expensive of a home you should be looking at.
For more information on what price point you should be focusing on, you can get started on the pre-qualification process here: mainstreethomeloans.com/hcochin