One of the first things you want to do when looking for a new home to purchase
is to determine how much you can afford. You should always start by finding a
mortgage company that will pre-qualify you. They will tell you how much they are willing
to loan for a house.
Of course it always seems like a mystery as to how they determine what you qualify for
so I thought that I would try to take some of the mystery out of it.
Basically there are two determinations that have to be calculated and balanced. The
first one is based on your take home salary and the second one is based on how much consumer
debt you have.
At this point, you can't do much about your income, but you can start eliminating all
your debts. If you are thinking about a new car, put it off until after you purchase
your new home. A new car loan can alter your income-debt ratio significantly and
thereby reduce the amount you can qualify for.
A rule of thumb for the first determination is that the monthly loan payment of principal
and interest should be less than twenty-nine per cent of your monthly take home salary.
For instance, if your take home monthly salary is $1,000 a month, then $290 a month
would be the absolute upper limit of your monthlty mortgage payment. Taking this figure
and working it backwords in most amortization programs provides you with a loan value of
$48,500 (calculated at 6 per cent interest for a 30 year term).
Now remember, this is the absolute upper limit because your debt ratio hasn't been factured in.
All your consumer debts such as credit cards, car loans, bank loans, or whatever should
not exceed 19% per cent of your monthly take home income. If it does, then your monthly
amortizaton payment will be reduced by a similar amount.
For instance, for the same $1,000 a month, your consumer debt should not exceed $190.00 a month.
If it does, then subtract the difference from your monthly income to calculate your monthly
mortgage payment.
Say you have a 250.00 a month car payment, then the difference is $60, so now your take
home pay would be $940 instead of $1000, and the new mortgage payment would be $272. This then
would calculate out to a new mortgage loan value of $45,800.
So now instead of qualifying for a $48,500 home, because of your $250 car payment, you only
qualify for a $45,800 home.
Of course, this is just an example to illustrate how your income and debt can effect your qualifying
factors to purchase a home. When you contact your mortgage company to pre-qualify, ask them
what they use as their criteria to determine the upper loan amount.
There are differnt criterias, and the per centages may vary between mortgage companies.
