Friday, June 16, 2006

Buying A Home? Know How Much You Can Afford?

Knowing what a mortgage lender considers when determining what they feel you can afford is crucial to finding the right mortgage, here are some tips about it:

Do you have enough income to repay the lender?
Income can be an important issue when applying for a mortgage, lenders want to know what you make, what your monthly debt obligations (credit card bills, etc) are, and if you have any other loans such as school or auto loans. If your debt-to-income (DTI) ratio is too high you may be asking for too much of a loan. Your DTI is based upon what your new monthly mortgage payment will be PLUS, your monthly debt obligations (car loan, credit card minimum payments, school loans, etc…) divided by your gross monthly income.

For example, say you have $750/mo in debt obligations, and you make a gross monthly income of $4000. Your back-end ratio (your debt to income %) would be approx. 19%, that’s not bad at all. On the front-end ratio (your expected mortgage payment) lenders normally allow up to 29% of your gross monthly income, so in this example you know that could be approximately $1200. When you add your monthly debt $750, to your expected mortgage payment of $1200, and divide them by your income of $4000, you’ll get a DTI of 48.75%. Lenders often have guidelines to turn down applications where your DTI is over 50-55%.

Have you been trustworthy and paid your bills on time in the past?
Your credit history is an important determining factor to obtaining financing. But it is not the end of the road if you have less than perfect credit, many lenders will still provide the mortgage for sub prime borrowers, but you’ll end up paying a little more in interest.

Do you have something to use as collateral?
If you should fail to be able to repay the lender, they want assurances that they won’t be left out in the cold holding the bag. This normally comes in the form of a down payment to show your seriousness and intentions.

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