If you’re thinking about homeownership you probably have some questions. Can I afford a home? Do I qualify for a mortgage? How much home can I afford? You can google to find a myriad of mortgage calculators. If you’re serious about buying a home, I highly recommend finding a lender or mortgage broker you’re comfortable with and get pre-qualified. The lender will take some basic information and tell you what you can afford, then you have about 120 days to shop as a pre-qualified buyer. This is different than being pre-approved...that’s when you actually fill out the mortgage application and your credit is checked. Getting pre-qualified will also let realtors know that you are serious about buying and not just window shopping.
Before starting the home buying process, consider these mortgage basics:
Total Obligations Ratio (TOR): Basically, this is your percentage of debt to income. Add all your monthly debts together (Car, credit cards, student loans, etc.) then add your new mortgage payment. DON’T forget about property taxes, insurance, homeowners association and any other fees associated with your home. This is extremely important because this can add HUNDREDS to your monthly expenses. You will be disappointed if you think you can afford an $1,800 mortgage just to find that your taxes and insurance tack on another $600 a month...now you can’t afford that $1,800 payment because it’s $2,400 total!
Another monthly fee you may not consider (generally if you put less than 20% down) is private mortgage insurance. You can thank the housing bust for that. More info on Understanding PMI to come!
Back to Total Obligations Ratio (TOR) ...take all your expenses ÷ total gross income (before taxes)= TOR. If your debt exceeds 36% of your income you probably won’t qualify for a conventional loan (unless you lower the loan amount). However, FHA could still be an option.
Example: Car Payment $360, Student Loan Payment $325, expected house payment $1,680 (principal/interest, taxes, insurance) Monthly Debt $2,365 ÷ $6,700 (gross income) = .3529 (35.3%) TOR
Here is a matrix provided by FannieMae (Non-conventional government loans) if you’re on the bubble of qualification and would like more information.
These numbers are just guidelines to get you started. There are usually exceptions. A good mortgage broker can shop around and find different options that will fit your needs. Contact me and I will help connect you to a mortgage broker in your area.