Thursday, July 14, 2011

How do I know what mortgage I can afford?

  1. Go to www.myhomeloandenver.com and complete the quick and easy 5 Step application.  MAC5 Mortgage will complete a no cost / no obligation review of your credit profile and will let you know (in advance) what you can comfortably qualify for. 
  2. You can also calculate the monthly mortgage payment for a house in your price range. You can do the math yourself, use an online mortgage calculator (free to use at http://www.myhomeloancolorado.com/mortcalcsplus/calculators.php), or ask your loan originator to complete the calculations for you. Don't forget to add in the monthly cost of homeowner's insurance and taxes. If you plan to put less than 20 percent down on the loan, you must also factor the cost of private mortgage insurance into your monthly mortgage payment. 
  3. Compare the mortgage payment to the rent or mortgage you currently pay. If the new mortgage payment is less than you currently pay and you can comfortably afford your current payment, it stands to reason that you will also be able to comfortably afford the new mortgage payment. The new mortgage payment can be more than you currently pay, so long as the increase in monthly payment isn’t deemed as payment shock which is typically defined as an increase that is 150% or more of your current mortgage or rent payment.
  4. Lenders typically look at two pieces for debt to income ratios (DTI).  The front end ratio can be calculated by dividing your prospective mortgage payment (principle, interest, taxes and insurance plus any mortgage insurance) by your gross monthly income. For example, if you earn $2,900 a month and your total mortgage payment, including taxes and insurance, totals $800, your debt-to-income ratio would be 28 percent. All lenders have different preferred debt-to-income ratios but, in general, lenders prefer that your housing (or front end) debt-to-income ratio not exceed 32 percent (may be approved at higher levels depending on compensating factors such as higher FICO scores, asset reserves, etc.).
  5. When looking at debt to income ratios the total payment DTI is typically the bigger part of the qualifying equation.  To get the total payment DTI, one needs to first add up your monthly debts (minimum required payment on revolving and installment credit lines) plus any other obligations that may not be tied to credit reporting such as child support, alimony, judgments or any other monthly payments that you are making.  The next step would be to calculate the total payments by dividing that number by your income, this will then present to you the total payment DTI (back end DTI).   For example, if you earn $2,900 a month and your total mortgage payment, including taxes and insurance, totals $800, and you have an additional $100 in credit card payments and a child support payment of $350 / month, your total payment debt-to-income ratio would be 43 percent. All lenders have different preferred debt-to-income ratios but, in general, lenders prefer that your housing (or front end) debt-to-income ratio not exceed 32 percent and your total payment (backend) to not exceed 45 percent (may be approved at higher levels depending on compensating factors such as high FICO scores, asset reserves, etc.).
  6. Talk to you loan originator about how your income and expenses measure up. If your debt- to-income ratio and overall debt ratio fall within your lender's parameters, your lender considers you capable of affording the new mortgage payment.  Apply now for a no cost consultation with MAC5 by clicking here.


Tips & Warnings

  • If your debt-to-income ratio or overall debt ratio is too high yet you have an excellent credit score, some lenders will make an exception for you. 
  • Paying down credit cards and other expenses prior to applying for a mortgage can help you qualify by reducing your total debt load.
  • Be sure to only work with a licensed loan originator that is authorized to operate in the state that you are seeking a loan.  To ensure your loan originator is properly licensed, you can go to http://www.nmlsconsumeraccess.org/ and simply type in the name of the loan originator.  


*All MAC5 Mortgage loan originators are required to maintain proper state and federal licensing, bonding and errors and omissions insurance, all to protect you, the consumer throughout the process.