So you have decided you want to buy a new home – now what? How do you figure out what you can qualify for? The easy answer is to talk to your loan officer! But there are some things you can do to get an idea of what you can qualify for.
One of the questions I usually ask every buyer is “what are you comfortable with in a house payment?” That gives me an idea of what they want to spend, whether they have done any type of budget or maybe even just dreaming! I say that as some people will say they want a payment around $1000 but may qualify for a lot more – they are being conservative and are concerned that they don’t want to get in over their head! Others may say they feel like they can afford a payment of $1800-2000 but in reality they can’t qualify for that amount. But most of the time, the amount you are comfortable with is a good starting point! As I tell many clients – you have to make the payment, I don’t and neither does your realtor – you don’t want to be housepoor!
Figuring out what you qualify for is fairly easy. You need to know what your income is – your gross income before taxes. So if you make $20/hour and work 40 hours/week, your monthly gross income would be $3466. Once you know that number, you can go through your debt. If you have credit card bills, look at the minimum amount that is due every month – not necessarily what you pay, but what is due. Add those up, add your car payments, student loans and any other debt. We don’t include your utilities including your cell phone. Just those items reported to the credit bureau. If you pay child support or alimony, include that payment. Once you know your debt, it’s simply a calculation. Take your income and calculate 45% of the income – so if your income is $3466, 45% is $1560. Now subtract your debt – if you have $400/month in debt, you subtract $400 from the $1560 and what’s left is what you can qualify for in a house payment. In that case, your monthly payment can be $1160. The $1160 includes your taxes, insurance, mortgage insurance and association dues – plus your principal and interest! Some programs require you to have a lower debt to income number – we will let you know – and some may allow more – but 45% is a good starting number!
Once you know what you can afford on a monthly basis, subtract out taxes, insurance, etc and get the amount you can have for principal and interest – let’s use an example – if your total payment is $1160 – taxes might be $125/month, insurance may be $100 and mortgage insurance will vary but let’s use $85- that leaves $850 for principal and interest. In a mortgage, that would be roughly $167,000 if the interest rate was 4.5% and it was a 30 yr loan. There are mortgage calculators available on many websites – including mine – that you can use to play with numbers.
Now there is more that can affect your mortgage qualifying – but your loan officer can give you more information. The program you want to use may have lower debt to income numbers, maybe you are self employed – that takes more calculations than we are using here. This is just a starting point to give you an idea of what you can qualify for. We will run your file through an automated underwriting system, sometimes we have to lower your debt to income numbers to get an approval. Sometimes it depends on how much money you may have in reserves – money left over after you close on your home.
The most important thing is for you do decide what you can afford – just because I say you can qualify for a payment doesn’t mean you want to spend that much. So look at your debt, your spending patterns, your hobbies and decide what you can afford. You don’t want to live for your house – make sure you can enjoy your life and still go out and do the things you enjoy. It is worth the time to do a little digging to figure out what you spend monthly on your hobbies so you know you can still do those things when you buy your new home! If you like to go out to dinner, figure out what you spend. If you like to go up north or maybe travel south in the winter – figure out what you spend and work that into your numbers.
Once you know what you are comfortable with, it will make it easier to find a home that works for you! Just make sure you tell your realtor and your loan officer the max you want to spend – we will help you find a home that works for you!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
