Most lenders don't want you to take out a loan that will overload your ability to repay everybody you owe.
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.
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.
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% of your gross monthly income. If you don't know what
your tax and insurance expense will be, you can estimate that about 15%
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% 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%
and 36% guidelines. For example, if you are able to buy the home while
borrowing less than 80% 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.
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.
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.
Just plan on contacting and investigating a number of lenders to find a loan program that meets your needs.