How Much Do I Qualify For?
Once your loan program is determined, your lender will determine the amount you qualify to purchase via the debt to income ratio. Your lender is really qualifying you for a monthly payment and then translating that into a loan amount or purchase price. Different loan programs will have different limits, and the ratio is determined by dividing the monthly debts by the monthly qualifying income. Sounds pretty easy except:
Monthly debts: This includes all your monthly obligations. Typically we use the payments reporting to your credit report, but some obligations need to be calculated differently or input manually such as deferred student loans, child support, debt not reporting to credit and tax and insurance on other properties owned.
Monthly Income: If you are a salaried employee, this one is easy. For everything else, there’s a skilled loan officer who is making sure that your income is calculated correctly for the loan program. Many types of income must be averaged over a period of time such as variable hourly pay (and if EVERY check is not 40 hours, that’s variable), bonus, overtime, and similar. Some income can not be used at all without a documented history or continuance.
Therefore- if you have a pre-qualification where the lender hasn’t reviewed your credit report and pay stubs or other income documentation, it’s not worth the paper it’s written on or the space in your gmail storage for the pdf.
Want to see an example? Let’s start with an easy one: Becky makes $60,000 per year as a salaried employee. She has a $400 dollar car payment, $100 in monthly minimum credit card payments, and pays $100 per month towards her student loans. Her loan program allows for a 45% debt ratio. What does she qualify for?
Start with her monthly income: $60,000 divided by 12 months equals $5000 per month.
Next, determine the maximum monthly debt allowed for the loan: 45% of $5000 is $2250.
Her total current monthly obligations are $400 + $100 +$100 = $600 per month
Her total monthly debt capacity of $2250 minus her ongoing obligations of $600 equals $1650
Therefore, Becky qualifies for a monthly housing payment of $1650, which means her mortgage payment including property tax, insurance, mortgage insurance, and any HOA fees must equal $1650 or below. Her lender will translate this into a purchase price using their best estimate of interest rate, insurance, and tax amounts.
It’s important to work with a lender who communicates well and is available when you’re ready to write an offer to make sure that your qualification figure works for the specific house!
