How Much Home Can I Buy?
To answer that question, lenders look at all the elements that make up your financial profile, including your credit history, the cash you have available for a down payment and closing costs, your income and your existing debt and financial obligations. Then, taking the current market interest rate into account, a lender can give you an estimate of the maximum mortgage amount you can afford. By adding your maximum mortgage amount to the funds you plan to use for your down payment, you will know your home purchase price range.
How Large of a Loan Can I Be Approved For?
Two general guidelines are used by lenders to determine the loan amount for which you may qualify. Based on your individual financial profile, these guidelines ensure that your housing expenses and debt payments don’t take up too much of your income. These guidelines can help you remain inside your financial comfort zone after you buy a home.
The first guideline, known as the housing expense-to-income ratio (or front-end ratio), compares your proposed monthly house payment (PITI) to your total household gross monthly income. The second guideline, known as the debt-to-income ratio (or back-end ratio), compares your anticipated monthly housing payment to your gross (pre-taxed) monthly earnings and your monthly debt requirements. Monthly debt includes expenses such as credit cards, car loans, student loans, consumer loans plus other financial obligations such as child support and alimony.
It used to be that most loan programs required 28/36 ratios, which meant you could devote up to 28% of your gross monthly income to housing expenses (the front-end ratio), while your monthly housing expenses plus your monthly debt combined could be as high as 36% (the back-end ratio).
Many of today’s loan programs offer expanded guidelines and much more flexible qualifying ratios that allow you to devote more of your gross monthly income to your combined monthly debt.
If you need further information, feel free contacting me and I can help you get a better idea of the maximum mortgage amount that you can qualify for. Depending on your financial profile and the mortgage program you choose, you may use standard or flexible ratios as a part of the qualifying process. Once you have this maximum figure, it’s up to you to decide if this is the right amount for you, or if you would feel more comfortable with a smaller mortgage and a lower monthly payment.