The first question that comes to the mind of any home buyer is, how much can I afford? Taking all your sources of income, the interest rate environment and mortgage insurance payments into consideration, the lender weighs this against your credit score and debt to arrive at a mortgage value you can afford.
This is a standardize way of computing how much you will be able to pay. However, all mortgage companies are not the same, some take a variety of variables into consideration.
Regardless of the mortgage company you will use, it is important to arm yourself with pertinent information about the mortgage qualifying process.
It is almost certain that your mortgage lender will use the debt to income ratio as the main yardstick for measuring your financial capability. In this case income is considered revenue from W2's, IRA, 401K's, Social Security and SERP plans.
The debt to income ratio (DTI) measures your gross monthly income (all sources of income) against your debts such as credit cards, auto loans and students loans.
The LOWER the ratio the better. A low ratio indicates that you will have enough money left over for emergency, other household obligations and discretionary expenses.
For instance, a family making $10,000 in gross income (before taxes and deductions) with $5000 in monthly loan obligations will have a DTI of 50%.
To get a clear vision of the DTI, lenders focus on two other ratios: your Housing Ratio and Total Debt Ratio.
In the housing ratio principal, interest, property taxes, flood and hazard insurance and homeowners association fees are considered. Lenders will typically want to see a figure of less than 25% of income.
Total Debt Ratio includes the following expenses: mortgage expenses, recurring debt payments, credit cards debt, auto loan, lease payments, personal loans, student loans, child support and alimony payments.
If your monthly income is $5000 and your total debt is $2000, your total debt to income ratio will be 40%. Most lenders prefer to deal with Total Debt Ratio of less than 50%.
A total debt ratio above 50% may disqualify you for a Fannie or Freddie Mac loan, but you may still be qualified for a FHA.
All mortgage loans are not the same and different loan categories may have varying qaulifiers.
You can select a mortgage loan type based on affordability or even the type of house being purchased. For instance, HUD homes and certain foreclosures generally come with different stipulations onlined by the governement.
Conventional mortgages generally sold to Fannie and Freddie requires higher down payments and stiffer underwriting covenants.
FHA or Federal Housing Administration covered loans are geared towards first-time buyers with not so-rosy credit history. The loan covenant stipulates a minimum of 3.5 percent down payment and a DTI of 50% with a FICO score of 580.
VA loans governed by the Veterans Affairs Office are designed for active and retired military personnel. The restriction are not as rigid as conventional loans.
The USDA also issues mortgage loan referred to as the Rural Development Loan, serving buyers in rural and small towns of America.
Before you go house-hunting you can do some basis homework on your own.
Check your credit score from Experian, Trans Union, and Equifax. Ensure that there are no discrepancies on your credit history. If there are, report it and have it rectified before attempting to talk to a mortgage lender. Your credit score will have a significant impact on the interest rate of the loan.
In addition, make an assessment as to what mortgage type is best for you. If you were is the military, then a VA loan might be preferable. Do a calculation of your income and expenses and calculate your DTI. This will indicate which category of loan best suit your financial circumstances.
Ask your realtor for help along the way.