The following is a guest post.
If you are getting ready to purchase a new home, one of the very first questions you will be asked by your Loan Officer when you speak to them for the first time is: How much of a monthly house payment do you think you can afford?
Pretty tough question to start with, huh? Yes, but It’s a great starting point for the Loan officer to understand you and your situation because only everything revolves around this number. This question will reveal where you have been so it better helps them understand where you might be able to go. Here is how:
- Some folks already own a home so this question is an easy one to answer. These people usually have a number pinned in the back of their mind and are determined to stay in the payment range based on their experiences of previously owning a home.
- Many people are already paying rent so they have a concept of how much of a payment they think they can handle. That doesn’t necessarily mean they are in the right ballpark when it comes to a new house.
- The First Time Homebuyer struggles with this question the most. They typically have no clue what their number is or where to start to find out.
How does the Lender determine how much of a house payment I can afford?
Regardless of what you think you can afford, the Lender (or more specifically the underwriter) will tell you what the maximum number is based on your credit, income and assets. So our job is to help folks determine the maximum they can afford so they are looking in the right price range when the house hunting starts.
The Lenders use the loan term and debt-to-income ratios (commonly referred to as DTI), to figure out the maximum house payment. The DTI compares your monthly debt expenses to your monthly gross income. You will often hear the Loan Officer say “36” is where we would like your back end, debt-to-income ratios to be. Here is an example.
1) First, add up all the monthly payments you make to car loans, student loans, credit cards, etc. and your proposed housing expenses – the total costs for your mortgage principal, interest, property taxes and insurance (PITI), and any homeowner association fees which apply if you are buying a condominium.
2) Next, divide your monthly debt amount by your gross income monthly income (before income taxes are deducted). Multiply that number by 100 to get your DTI as a percentage.
For example, if you have a $350 car payment, $300 student loan payment, $200 in credit cards and $1,200 proposed house payment, your total monthly debt commitment is $2,050.
If you make $65,000 a year, your monthly gross income is $5,416 ($65,000 divided by 12 months). Your debt-to-income ratio is $2,050 divided by $5,416, which works out to .38 or 38%.
Who can help me with this?
Your local mortgage broker is experienced and can help you walk through these steps. They are available to meet you face to face and they actually prefer to do so, even in this digital age we are in now. You will be required to share everything about yourself in order to qualify for a mortgage. It is often a humbling process but looking the person in the eyes across the table can help ease some of your anxiety.
About the Author: Kirk Chivas is a licensed Loan Officer and co-owner of First Commerce Financial, LLC, a mortgage brokerage based in Wixom, Michigan. With over 17 years of experience, Kirk has committed to providing Michigan residents with accurate and honest mortgage advice.
5 Comments
We did a thorough analysis of what we could afford before buying our home. It was important for us to be able to maintain our lifestyle.
@Suburban Finance – That’s a great tip. We’d like to buy a home in the next 18-months or so and we are also looking at maintaining our current lifestyle. It definitely limits the size and location of the house we can buy, but I really don’t want to get in over my head.
The last person in the world I would trust to come up with a number I can afford would be a mortgage broker. Their interest is going to be in getting you into a larger house with a larger mortgage so they make more money. Based on our rent and wanting to save money for repairs, we’ve determined that when we are ready to buy, we won’t want to borrow more than $100,000. Fortunately, with a decent sized down payment, that still buys a pretty good home in this area.
Agreed!! One lender was willing to give me three times what I could have afforded and what was most of my monthly net pay. You have to run the numbers yourself, and don’t forget the extra costs of home ownership. Property taxes go up frequently (and often right after you buy the home if you pay more than the previous owner). And don’t forget maintenance and repairs costs. Sooner or later something is gonna break, and eventually something expensive is gonna break or need replacing.
I remember how my husband and I reacted when the first lender we met with tried to tell us how much house we could afford. I was so shocked I embarrassed my husband by blurting out, “If we can’t afford that in rent, how can we afford that in a mortgage payment?” We chose how much house we could afford and we’ve done that with each purchase.