Before house-hunting ever begins, it is good to know just how much house you the borrower can afford. much like going shopping for a car or clothes, you first need to know how much money is in your wallet to spend so to speak. If you plan ahead, time will be saved in the long run and applying for loans that may be turned down and bidding on properties that cannot be obtained can be avoided. The old formula that was used to determine how much a borrower could afford was about three times the gross annual income. While the formula works for many to help get a general idea of the budget they will need, this formula has proven to not always be reliable. It is safer and more realistic to look at the individual budget and figure out how much money there is to spare and what the monthly payments on a new house will be. You can use the calculator on my site to enter homes that have pricing and enter in the loan term information to help with getting average monthly payments based on selected home selling prices that are appealing to you when searching the MLS provided at no cost on my site. When figuring out what kind of mortgage payment one can afford, other factors such as taxes maintenance, insurance, and other expenses should be factored in as well. Usually, lenders do not want borrowers having monthly payments exceeding more than 28% to 44% of your monthly income. For those who have excellent credit, the lender may allow the payments to exceed 44%. Check your Credit history thoroughly! Lenders like to look at credit histories through a request to credit bureaus. This allows the lender to make a more informed decision regarding loan prequalification. Once the report is obtained with your permission, your credit score, also called the FICO score will be evaluated for credit worthiness. Usually the report is retrieved from the major credit bureaus TransUnion, Experiean, and Equifax. The FICO score represents the statistical summary of data contained within the credit report. It includes bill payment history and the number of outstanding debts in comparison to the borrower’s income. The higher the borrower’s credit score, the easier it is to obtain a loan or to pre-qualify for a mortgage. If you routinely pay bills late, then a lower credit score should be expected. If you have excessive student loans that soon will be due this to can affect your monthly debt ratio calculations lower the amount you may borrow. While having active credit is good it is a good rule of thumb with credit cards to have no more than three active accounts with the balances never higher than one third your credit limit. Also, medical bills while less burdensome on your evaluation still can affect your debt ratio calculations so pay these on time and make sure all are current not delinquent. The same applies to loans on vehicles and personal loans. While paying off debts are always good keep in mind it ideal to have a few active credit lines to maintain good scores recently reported for evaluation. What this means is a lower score may persuade the lender to reject the application, require a large down payment, or assess a high interest rate in order to reduce the risk they are taking on approving a loan for you. The first step in determining if you have any outstanding issues is to get a copy of your own personal credit report. allows you to see your credit reports from Experian, Equifax & TransUnion for free once annually, so you shouldn’t have to pay a fee as long as only one report is requested within a one year period. After basic calculations have been done and a financial statement has been completed, the you can ask the lender for a prequalification letter. What the prequalification letter states is that loan approval is likely based on credit history and income. Prequalifying lets the borrower know exactly how much can be borrowed and how much will be needed for a down payment. Keep in mind, prequalification may not be sufficient in some situations when attempting to make an offer on a house. Ideally you want to be preapproved because it means that a specific loan amount is guaranteed based on your personal documents of proof of what you explained to the lending agent about your monthly income and debts. A pre-approval is more binding and it means the lender has already performed a credit check and evaluated your financial situation, rather than relying only on your own statements as is the case with a prequalification. Preapproval means the lender will actually loan the money after an appraisal of the property and a purchase contract and title report has been drawn up. So simply put if you have not delivered documents such as the past two years W-2 forms, bank statements, check stubs, etc. you most likely will not have a Pre-approval letter but instead a pre-qualification letter. Obtain a pre-approval letter BEFORE attempting to get a real estate agent to process an offer for you to save disappointment. There are two factors in most cases used to decide your pre-approval. (1) Your total monthly income ratio which is the total monthly housing costs compared to total monthly income. So you should write down this information before deductions to have handy, so the totals can be calculated with the lenders standard percentage multiplier. This ratio multiplier varies from lender to lender but is what most lenders will use as a guide to what the total housing costs are for your circumstances. Depending on the percentage, a higher percentage may be used when calculating your financial status in some cases based on varying factors used by the lender. (2) Your debt to income ratio is calculated. In this scenario you write down all monthly payments that extend beyond 11 months into the future. These can be installment loans, car loans, credit card payments, etc. The resulting number in the first step should be multiplied by .35 and the total monthly debt should not exceed the resulting number. Also, if the loan will exceed the amount the property is worth, the lender usually will not loan the money. However, if the appraisal shows the property is worth less than the offer, the terms can sometimes be negotiated with the seller and the real estate agent representing the seller which is why it is good to have a real estate professional representing you as a buyer to ensure you get fair options when offering to buy a house. Sometimes you may even pay the difference between the loan and the sales price if the lender agrees to purchase the home at the price that was originally offered to them to be considered. To do such a thing, you may need to have disposable cash and should ask the question of whether or not the property is likely to hold its value to your real estate professional so they can give you a good reference based on the current market values in the area the house you wish to purchase is in. You must also consider the type of loan you qualify for. If you would need to move suddenly and the loan is larger than the value of the property, the loan can be a very difficult thing to pay off. This decision would be made directly in relation to the amortization of the loan over time which your lending agent and / or your real estate professional should be able to assist you with determining. When discussing your options on your first consult with your real estate agent ask them about lending program options in your area you may qualify for. Such programs as FHA backed lending often can decrease the amount of down payment you have to come up with but does add some additional expenses in your monthly note until you reach the 20% mark of being vested in equity of the value of your original loan amount. There are other lending programs out there as well so make sure you speak with your real estate agent to get an educated view of your options before deciding on what is best for you in your endeavors to obtain a loan. As always I offer free consultations for all potential buyers to help them prepare for buying a home EVEN if they cannot buy for several months after assisting them with looking at their current financial status. I have worked with some clients as long as 18 months helping and guiding them to the point of successfully buying the home they dream of.

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