One of the first questions that comes to mind when you are deciding where to buy a house is how much house you can afford or how much mortgage you will qualify for. There are some important determinants that the lenders look at when approving the home loan amount. Scroll down for information on what determines mortgage approval amounts.
Your Income Banks will begin with gross monthly income that is the amount of money you earn before you are subjected to any deductions like taxes. It means that they wish to have assured and fixed levels of income in the long run. Full-time employment, job stability, and permanent employment are the most ideal when looking for mortgage approval. They may also include bonus, commissions, investment income or side jobs but usually in a lesser proportion. Be ready to submit W-2s along with the recent pay stubs and tax returns when applying for the home loan.
Your Debts Your cyclical obligations will be analyzed by the lenders to determine your debt-to-income ratio. DTI is the ratio of your total monthly debts and your gross monthly income. Conforming mortgages typically have a DTI of 43% or lower. In federal loans, DTIs are usually considered up to 50%. DTI is the ratio of the total amount of monthly debt payments to the amount of gross monthly income; all things being equal, the lower the DTI, the easier it is to make mortgage payments and meet other monthly obligations. Lenders need to ensure that your income is sufficient to pay off your current obligations, as well as make a monthly mortgage payment.
Your Credit Scores Your credit report and credit scores from the three credit reference agencies; Experian, TransUnion, and Equifax will be used to assess your creditworthiness. Most of the lenders will consider a conventional home loan applicant with a credit score of between 620-640. Federal loans enable borrowers with low credit scores of 500+ to access loans. However, the higher your scores are, the better mortgage rates and amounts you will be eligible for. Low credit utilization, few or no instances of having made a payment after the due date, low credit card balances, and not applying for new credit in the recent past will help in getting higher rates as well as higher approval limits.
Your Down Payment The down payment is the portion of the cost of the home that you pay out of your pocket before obtaining a mortgage loan. If you can put more money down, you are likely to get higher approval amounts for two main reasons. First, larger down payments logically mean that there will be a smaller loan amount required. Second, by increasing the down payment, the lenders avoid high risks and can therefore offer higher cost homes. You can anticipate 3-5% down payment for basic home loans and 3. 5% for federal home finance.
The Purchase Price and Location Of course, the price of the home that you are interested in influences the amount of the loan that you will require and which you can obtain. This means that the higher the neighborhood and property prices in a location, the larger the mortgage sizes. Other factors such as median home prices and property tax rates in some of these cities or suburban regions affect the borrowing limits for mortgage within those regions. This means the amount of money that you are qualified to borrow may not be fixed according to the current price but can change depending on the location.
Mortgage Amount Formulas As a general rule of the thumb, probably the best conventional mortgage amount that a lender will approve can be evaluated by simple mathematical formulas in relation to the verified income and debt. One common calculation used is:One common calculation used is:
Potential mortgage amount = 3 x your gross annual income
Therefore, multiply your income by 3 to get an indirect estimation of the maximum amount of mortgage that is allowed for the particular case. This comes with a little variation because there are some lenders that will approve your loans with this formula based on 2. 5 or even 4 times your gross annual income.
The second common calculation made by lenders is to subtract your recurring expenses from your income and multiply the result by… a factor of the down payment. For example:
Potential mortgage amount = (Monthly income x 12) – Monthly debt payments + [Down payment factor x down payment]
If you make down payment of 5%, the factor is likely to be around 5. So the formula would be:So the formula would be:
Thus, potential mortgage amount = [($5,000 income x 12) – $20,000 annual debts] x 5
That is the same as $190,000 mortgage amount. This again will vary from one lender to the other but employs your income, debts and down payment to predict possible home loan approvals.
Pre-Approval vs Pre-Qualification Pre-approval and pre-qualification from lenders are crucial to establish the approximate mortgage amounts. Pre-qualification relies on elementary credit information you enter to estimate credit limits that one is likely to qualify for. Pre-approval on the other hand is more precise as the lender checks your assets, income, debts, credit and down payment through documentation. Pre-approval on the other hand is a much stronger offer than estimates from pre-qualification as it is officially given. On the other hand, getting pre-approved will help you convince home sellers that you are serious buyer, who has been pre-approved for a loan.
The Mortgage Process It is always wise to compare your options amongst several mortgage lenders. Both will consider your eligibility in a somewhat different manner and from the aspect of various factors. When searching for the rates and applying for a pre-approval, you will be armed with an approximate range of the amount approved by several lenders before making an offer. After getting under home contract, the particular lender will formally authenticate all of your financial information as well as qualifications and the property to get the final mortgage funding.
Rule of Thumb A good guideline should be to spend no more than 28 percent of one’s gross monthly income on total housing costs. This involves the amount borrowed to buy your home, the interest on that amount, taxes and insurance on your property, and any other costs that are related to maintaining a home. This percentage provides a rough approximation of how much money one might have to set aside for a house before buying, using the lender approval amounts as a guideline.
Get pre-approval quotes from multiple lenders, address any credit problems in advance and accumulate for bigger down payments. But if you get to know what goes into computations of mortgages, you can go shopping for homes within the range of appropriate loaning limits you can afford.
