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As you think about applying for a home loan,
you need to consider your personal finances. How much you earn
versus how much you owe will likely determine how much a lender
will allow you to borrow.
First, determine your gross monthly income. This will include
any regular and recurring income that you can document. Unfortunately,
if you can't document the income or it doesn't show up on your
tax return, then you can't use it to qualify for a loan. However,
you can use unearned sources of income such as alimony or lottery
payoffs. And if you own income-producing assets such as real
estate or stocks, the income from those can be estimated and
used in this calculation. If you have questions about your specific
situation, any good loan officer can review the rules.
Next, calculate your monthly debt load. This includes all monthly
debt obligations like credit cards, installment loans, car loans,
personal debts or any other ongoing monthly obligation like
alimony or child support. If it is revolving debt like a credit
card, use the minimum monthly payment for this calculation.
If it is installment debt, use the current monthly payment to
calculate your debt load. And you don't have to consider a debt
at all if it is scheduled to be paid off in less than six months.
Add all this up and it is a figure we'll call your monthly debt
service.
In a nutshell, most lenders don't want you to take out a loan
that will overload your ability to repay everybody you owe.
Although every lender has slightly different formulas, here
is a rough idea of how they look at the numbers.
Typically, your monthly housing expense, including monthly
payments for taxes and insurance, should not exceed about 28
percent of your gross monthly income. If you don't know what
your tax and insurance expense will be, you can estimate that
about 15 percent of your payment will go toward this expense.
The remainder can be used for principal and interest repayment.
In addition, your proposed monthly housing expense and your
total monthly debt service combined cannot exceed about 36 percent
of your gross monthly income. If it does, your application may
exceed the lender's underwriting guidelines and your loan may
not be approved.
Depending on your individual situation, there may be more or
less flexibility in the 28 percent and 36 percent guidelines.
For example, if you are able to buy the home while borrowing
less than 80 percent of the home's value by making a large cash
down payment, the qualifying ratios become less critical. Likewise,
if Bill Gates or a rich uncle is willing to cosign on the loan
with you, lenders will be much less focused on the guidelines
discussed here.
Remember that there are hundreds of loan programs available
in today's lending market and every one of them has different
guidelines. So don't be discouraged if your dream home seems
out of reach.
In addition, there are a number of factors within your control
which affect your monthly payment. For example, you might choose
to apply for an adjustable rate loan which has a lower initial
payment than a fixed rate program. Likewise, a larger down payment
has the effect of lowering your projected monthly payment.
Greg and Marisa can help you become pre-approved.
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