Buying a Home

Qualifying for a Loan

Can you afford that new dream home? Find out here, and get a jump on the process.

How The Bank Qualifies You For A Mortgage
Before the lender agrees to loan you the money, you need to meet certain standards that determine if you qualify for a mortgage loan, and if so, how much. Established rules and formulas exist to guide the lender in determining the potential creditworthiness of an applicant.

The decision on your home mortgage loan is based on several basic factors. These include your income, the amount of your existing debt, how much you will be borrowing, the value of the home you are purchasing, and your credit history.

Debt Ratio
The first thing you need to know about is something called your debt ratio.

Lenders typically follow two general ‘rules of thumb’ in determining how much mortgage you can afford based on your level of income and your existing debt payments. In today’s environment, reliance on these ratios is not as rigid as it once was, but it remains the ‘first cut’ in estimating how much a bank or mortgage company is willing to lend you.

Let’s take a look:
Traditionally, your monthly housing expense should not exceed more than 28% to 33% of your gross monthly household income.   Again, many lenders today have less strict requirements.  Housing expense is defined as your monthly payment of principal and interest, 1/12th of your annual real estate tax bill, and 1/12th of your cost of home insurance (often referred to as PITI). The ratio can vary depending on the lender, the amount of your down payment, your other debt, or other factors.

Your total monthly payments on all debt, including your PITI as well as all other installment debt(such as car loans, credit cards, etc.), should not exceed 33% to 38% of your gross monthly income, although many lenders now allow percentages in the 40% to 60% range.

Be aware that the higher the percentage above that apply in your case, the more risk you will be assuming.

Some lenders will calculate your mortgage debt ratios and offer you a pre-purchase loan commitment before you buy your home. Having this ‘pre-approved’ status eliminates that uncertainty for the seller and makes you a more attractive buyer. This gives you additional buying power when negotiating the purchase price of your potential home.



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