Getting to know what you can afford

The rule is that you usually can buy three times as much as you make.  So if you make $50,000.00 per year, you can buy up to $150,000.00.


This will be in the perfect world of course and if you have absolutely no other debt, no car payment, no student loans, no liens, no credit card payments, etc.  The whole thing is based on something called a Debt-to-income Ratio.


What is the Debt to Income Ratio?


A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include certain taxes, fees, and insurance premiums as well. )


There are two main kinds of DTI, as discussed below.  The two main kinds of DTI are:

1. The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (Mortgage principal and interest, mortgage insurance premium [when required], hazard insurance premium, property taxes and homeowner's association dues [when applicable]).
2. The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.

Example:

In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:

• Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
  • $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
  • $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.

In order for your lender to get you pre-qualified for a mortgage and find out what you can afford, they have to review the following:

• Last Full Month Pay stubs
• Last 2 years W2's (or 2 years tax returns if you are self employed)
• Last 2 months Bank Statements
• Any Other Income you might receive (Proof for the last 3 months if it's Social Security or Disability, Pension, Alimony, Child Support. - This has to continue for the next 3 years in order to be considered usually)
• If you pay child support or alimony, you need to provide with divorce decree and child support court order or alimony order.
• Any Assets you may have (401K, Investments, IRA, Life Insurance, etc.)
• Review Full Tri-Merge Credit Report

Be honest with your lender, things do come up, if you fail to mention a lien or something that is bothering you but you are thinking about hiding, better not, talk to your lender about it, it's better to be honest up front so things do not come up later on and, believe me those surprises are not usually good.  They can delay closing or even cause the loan to be denied.

The lender will then review your paperwork and do a pre-qualification for you, with your income and your credit and by taking a loan application.

It is true that the better your credit score you are better off getting the best rate and a very good loan, but that doesn't help you necessarily to afford more for a house.  That is all up to your debt to Income Ratio.

Different Types of Loans will determine what DTI is acceptable.

Some of the best loans to get as per my experience are the following:

• Conventional 30, 20, 15 or 10 Year Mortgage  DTI    28/36
• FHA 30, 25, 15 years Mortgage  DTI    31/43
• USDA 30 years Mortgage  DTI   29/41
• VA 30 or 15 years Mortgage  DTI 41

It is really your lender's job to know which program is the best for your situation, if it is a good lender they will make the right choice for you.