How Much House Can I Afford

What Can I Qualify For to Buy A House

While the regulations for financing a home today have gotten more stringent, this is not a bad thing. The fear that some people cannot get a loan is in my opinion ludicrous. I say that because the criteria for getting a home loan is back to where it was prior to the “free money for everyone”.

  • FHA has extended the loan limits for buyers to help those who are qualified to purchase a home, which is a big plus for first time buyers
  • Interest rates are still unbelievably low. (I have worked in markets when the rates dropped to 10% we were elated…and people were still buying homes)
  • Non conforming and conforming loans are plentiful

The criteria for any loan today (2010) is as a buyer you have to qualify – enough income, limited debt and good credit. Just because your credit history is not perfect, does not mean you cannot get a loan.

I insist that all buyers who want to work with me get “pre-approved” by a lender. Not pre-qualified – but approved. The pre-approval will help you the buyer and me the real estate agent focus on properties you can afford and will be able to buy. Listing agents and sellers want assurance before accepting your offer that you are qualified to close the deal. Most listing agents will not even present an offer to their Seller without the “pre approval letter”.

How Do Lenders Determine How Much I Will Qualify For

Income to Debt Ratio

The percentage of one’s debt to income is one of the most important factors when underwriting a loan and the two criteria to determine what you will qualify for are:.

  • House payment: Not to exceed 30% of monthly gross income (income before taxes). If you are setting up an escrow account and putting less than 20% down, your payment will include taxes, homeowners insurance and mortgage insurance. The total number is taken into account, not just the principal and interest.
  • House Payment plus minimum monthly revolving and installment debt – not to exceed 35-41% of gross monthly income (the variance will depend on the source of financing with FHA loans allowing for a higher back end ratio).

As an Example

$10,000 gross monthly income. The maximum mortgage payment is: $10,000 x .30 = $3,000 maximum monthly mortgage payment (with good credit this ratio may be extended higher–check with a lender)

Total credit cards & car payments = $1,500/month– – $10,000 x .40 = $4,000 maximum amount for house payment and debt. Based on these numbers the maximum mortgage a person would qualify for is $2,500.

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