Though it’s thrilling to gain the title of homeowner, it’s critical to understand the financial realities that come with this exciting, newfound responsibility. A mortgage catapults your finances into an entirely new realm and it’s important to grasp how it’ll impact your overall budget. The first step in this process is to seek council from an experienced loan officer and discover what you qualify for.
How do I qualify for a mortgage?
The one factor a loan officer will check during the qualification process is your debt-to-income ratio. Once you provide the necessary documents, your loan officer will look at your monthly income versus your monthly debt. Your debt-to-income ratio is calculated by adding up your monthly debt payments and dividing that number by your gross monthly income.
Here’s an example from the Consumer Financial Protection Bureau*:
If you pay $1,500 a month for your rent, and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1,500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2000 is 33 percent of $6,000.)
A high debt-to-income ratio suggests concerns making a monthly mortgage payment and may lead to problems repaying the loan. Any number below the standard 43 percent is generally considered acceptable when qualifying for a mortgage.
How much can I afford?
Now that you have a better understanding of what a loan officer will look at, you’re probably wondering what you can realistically afford. The biggest element in determining what is obtainable will be the down payment you’re able to initially put down. Traditionally, 20 percent of the home’s asking price is standard – anything above the 20 percent benchmark almost guarantees a better rate or term. On the other hand, anything below 20 percent may require additional mortgage insurance to protect against potential default. However, don’t worry if you don’t have 20% to put down – PrimeLending offers a wide range of loan options that require low to no down payment.