Now, that you've decided to purchase a home, and you've gathered your team of professionals, who will guide and support you through the processes, it's time to answer the next big question: How much? How much can you afford? How much will are you qualified for?
While these may seem like the same question asked in two different ways, they are not. What a borrower can afford to pay can sometimes be different than the amount for which a lender determines qualification.
Qualification is the decision made by the lender on whether or not a borrower meets the standards required for a loan. Qualifying for a loan is not the same as being approved for a loan. Lenders do not consider utility payments, cell phone bills, repair expenses for a car or home when making this decision. Lenders debts from accounts that report to the credit bureaus like student and auto loans. In some cases, they may request to see proof of on-time rent payments to get more insight into how a borrower handles her finances.
In addition to evaluating credit, assets, and liabilities or debts of a borrower, lenders use a formula to determine the Debt-To-Income ratio of each borrower seeking financing. Debt-To-Income Ratio or DTI is determined by dividing a borrower's total monthly expenses (those listed on the credit report) including the new estimated mortgage payment, by their gross monthly income. Most lenders like to keep ratios between 28% - 44%, but every loan, lender and borrower is different. There are scenarios that may allow for a borrower with a higher DTI to still qualify.
Let's use our imaginary borrower, Asha, as an example. Asha has $1000 in monthly payments each month. Her new estimated mortgage payment is $1800.00 per month, and her gross monthly income (income before taxes) is $7000.00. Her DTI is .40 or 40%, so 40% of her gross monthly income would be allocated each month to paying her mortgage and other debts.
Affordability refers to what a person feels comfortable with paying while considering budget, all expenses, and personal lifestyle preferences, like dining out. Knowing your DTI may help a borrower determine personal affordability, but potential home buyers should also consider the expenses associated with purchasing a home from a holistic perspective.
- Upfront payments are those that require payment prior to finalizing the financing:
- down payment
- closing costs
- earnest deposit
- application fee
2. Homeownership costs:
- property taxes (included in the mortgage payment, but they can fluctuate)
- homeowner's insurance
- mortgage insurance
- property maintenance, i.e landscaping
It's important to give thought to the amount you are able to borrow as well as the amount you can afford to pay. Consider all the costs associated with homeownership along with your personal obligations when determining what payment you can live with.
Please Note: This article is provided for illustrative purposes only. It is not an offer or commitment to lend money, and it is not an advertisement for a specific mortgage or a specific interest rate. Contact me to run the numbers for your situation.
How Can I Help You?
As a mortgage loan officer with Jersey Mortgage Company, I can assist borrowers in New Jersey, Connecticut, Florida and Pennsylvania with getting pre-qualified for a home loan.
By offering information and educating clients on the mortgage loan process and servicing each borrower's individual needs, and partnering with Realtors to create a seamless transaction, I am able to exceed expectations and ensure that deals are closed on time!