Qualifying For A Mortgage
By: Nicole Gates
One of the most anxiety-driven parts of buying a new home is seeing if you qualify for your mortgage. To some, it may seem like a gamble, with no way of predicting if you'll qualify or not. However, it's a very specific equation to not only help the lender decide if you're a reliable risk, but also to make sure that you won't be overextending yourself in order to afford your new home.
But what is this equation? How do you know if you make enough to afford the new home of your dreams?
Previously, it was a good tip that a borrower could afford three times their gross annual income on a home loan. That would mean, if you made $40,000 per year, you could afford a $120,000 mortgage.
However, it's wiser to take a much deeper look into what mortgage amount would fit your lifestyle. Take the time to look into your individual budget and figure out how much money you have to spare. Decide what a monthly payment on a new home will be, while figuring in taxes, maintenance, insurance and any other expenses that come along with owning a new home.
Generally, lenders want borrowers to have monthly payments around 28-44% of a borrower's monthly income, but with a total monthly debt that doesn't exceed 35% of that income.
To do this, lenders determine your mortgage amount in two ways:
1. Total Monthly Housing Costs Compared To Total Monthly Income
Through this process, a lender will take your total gross amount you receive per month and multiply it by .28 to determine what the total housing costs are going to be for you.
For example, say you make the $40,000 annually we mentioned above and you only want your max payment to be 28% of that. Your lender would take 40,000 and multiply it by 0.28 to get 11,200. Then they would divide this number by 12 months and your max monthly payment should be $933.33.
2. Debt To Income
To figure out your debt, the lender then takes all of your monthly payments, extending beyond 11 months into the future (this includes installment loans, car loans, credit card payments and more) then multiplies that number by .35. The total calculated should not be exceeded by the total monthly debt for you to qualify for a new home loan.
For this, your lender would take your annual earnings of $40,000 and multiple it by 0.35 to get 14,000. Divide 14,000 by 12 months and your monthly debt, including your new mortgage payments, shouldn't exceed $1,200.
For more help figuring out exactly what you can afford in order to qualify for a new mortgage, check out our Mortgage calculator. Or download our eBook "Demystifying the Mortgage Process", a jargon-free guide for a smooth mortgage process.