Determining Your Housing Budget
Many homebuyers are unsure how much they can afford to spend on a home. Even if homebuyers could be pre-approved for a home at the top of their budget, they might be more comfortable with a lower monthly payment when considering their full financial profile.
Many homebuyers benefit from using a mortgage payment calculator to help them visualize their monthly expenses. If homebuyers are planning to put down 10% and want their maximum monthly payment, including taxes and insurance, to be around $2,700 – they might be limited to a home purchase of about $440,000.
These calculations are somewhat involved, but an experienced mortgage analyst can do them in seconds. There are many mortgage financing options out there, and a reputable lender can help match homebuyers to their ideal loan program.
How Much Can You Get Pre-Approved For?
The maximum loan amount a lender can pre-approve homebuyers for depends on several factors:
- Down payment
- Income
- Other monthly expenses
- Credit score
Determining Your Down Payment
The down payment amount determines the loan amount and, therefore, the monthly payment and if mortgage insurance will be required.
Lenders are always calculating risk. There are specific measures to ensure that lenders can protect their investment- the money they are lending. One way they limit their risk is called “protective equity,” or the buyer’s down payment in most cases.
Mortgage lenders secure their loans with a deed of trust, ensuring they can get their money back if the borrower ceases making payments through a legal process called foreclosure. This means that the lender is entitled to the property’s equity to get their money if the buyer doesn’t make payments. If the equity in a property doesn’t pay off the loan and pay the foreclosure expenses, the lender can technically pursue the borrower for the deficiency.
Calculating Your Debt-T0-Income (DTI) Ratio
An essential number calculated when reviewing loan applications is called the Debt-To-Income Ratio (DTI). DTI is calculated by dividing the total house payment (including taxes, insurance, plus monthly mortgage insurance, if any) and other monthly expenses (car payments, student loans, credit cards, etc.) by the monthly income before taxes.
Examples of non-housing expenses:
- Car payment, auto insurance, gas
- Credit card bills
- Groceries, dining out, entertainment
- Savings account dues, IRA, etc.
Conventional loans can be approved with a DTI as high as 50%. FHA loans insured by the government allow for a little higher DTI ratio, sometimes 55%.
Assessing You Credit Score
Credit scores are one of the many factors that determine the interest rate buyers receive and also the cost of mortgage insurance, if required. While lenders can usually approve a borrower for a conventional loan with scores as low as 620 and an FHA loan as low as 580, the rate a borrower with a lower credit score receives will be higher. A borrower with a credit score of 620 can anticipate paying about .75% more in a loan rate than someone with a 740 or higher score.
Questions? Ask JVM Lending
If you are considering a future home purchase and have questions about how much you can afford to spend on a house, contact our team! JVM Lending’s Mortgage Analysts are available 7 days a week by phone at 855-855-4491 or by email at [email protected] to help answer any questions or alleviate any concerns you might have about mortgage financing and the homebuying process.
