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Why? First timers are sometimes surprised at how much they can actually qualify for when compared to what they currently pay in rent, that is if they pay rent at all prior to buying a home.
Lenders use debt to income ratios in order to determine affordability.
The debt ratio is calculated by dividing the total housing payment by the gross monthly income.
The total housing payment is made of the principal and interest payment, monthly property tax payment, homeowners insurance, any mortgage insurance or PMI and any Homeowners Association Dues.
The desired ratio for a housing payment is typically around 33 percent.
If a borrower makes $6,000 per month, then a lender wants to see about 33 percent of that amount be dedicated to housing, or in this example, just under $2,000.
But how does a lender determine how much you can borrow? A lender will first review your gross monthly income then apply the 33 percent ratio.
Say that amount is $2,000 for housing.
A lender will then deduct the estimated property tax, insurance, PMI (if required) and any HOA dues.
In this example, say those deductions would leave $1,600 left for the principal and interest payment.
The lender will take that $1,800 and select a loan term along with a current market rate.
If we apply a 3.
5 percent rate and using a 30 year term, the result is a qualifying loan amount of just over $350,000.
For a first timer, that's a lot of money.
It can be scary, in fact.
At the same time, even though someone can qualify for a $2,000 per month house payment, do they really want to? A first time homebuyer who is used to paying $1,500 per month in rent will find his house payment increasing by one-third.
That's something to consider.
You may qualify for a higher monthly payment, but if you don't feel comfortable in making it each and every month, simply tell your lender what you'd feel comfortable paying and they'll take it from there, providing you with your ideal payment.
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