As a REALTOR® and not a mortgage banker, I thought it best to consult my friend and colleague at Brand Mortgage, Marilyn Cain, on this issue and below is what she says that one should consider in finding out how much you can afford.
“There is an easy way to calculate how much house you can afford. Mortgage lenders look at your Debt to Income (DTI) Ratios. There are 2 ratios you need to calculate:
1. Your Housing Expense Ratio. Your debt used in this ratio is the amount of your mortgage. This number is composed of:
Principal + Interest
Property Taxes
Homeowner’s Insurance
Mortgage Insurance (required on mortgages with less than 20% down payment)
2. The debt for your second ratio will be the amount of your mortgage, listed above, plus monthly payments of any debt outstanding. This would include debt such as car loans, student loans, bank loans and credit card minimum payments for revolving cards that you do not pay off every month. If an outstanding loan has less than 10 months balance remaining, it typically will not be counted in this amount.
Your income is your monthly income and must be quantifiable. In other words, if you received a one time gift from a relative or a one time bonus, the amount cannot be considered part of your income.
Conventional loans versus FHA loans
FHA loans have more lenient ratios than Conventional loans. Also, FHA loans are popular with first time home buyers because the down payment required is only 3.5%. The down payment can be in the form of a gift. Conventional loans require a 5% minimum down payment and must be your own funds.
Qualifying DTI Ratios:
FHA 31% for the 1st ratio or the Housing Expense Ratio
43% for the 2nd ratio
Conventional 28% for the 1st ratio
36% for the 2nd ratio
Having stated the qualifying ratios, let me say that individual cases can justify higher ratios. Let your mortgage banker work with you as you shop for a home to let you know how much home you can qualify for and which loan products will best suit you.”
Thanks Marilyn! (Marilyn Cain, Mortgage Banker, Brand Mortgage, 770.822.2359, mmcain@brandmortgage.com)
Put some prep work into this pre qualification with your lender. It will save you time and will enable your REALTOR® to help you find homes within your budget.
I’d be happy to refer to a lender and help you find your first home.
Want more information? See my other blog post on “First Time Home Buying“