- Know your debt to income ratio. Most lenders will allow up to 36% debt to income ratio in order to qualify you for a home mortgage. Do the math. Simple math tells us that if your household income is 100,000/year, you may have outstanding debt of up to $36k in order for a mortgage lender to qualify you for a loan. Determine your gross annual income and multiply this number by .36 – the result will be the total of how much debt a lender will allow.
- Lenders will likely calculate your maximum allowable monthly loan payment based on 28% of your gross monthly income. Let’s do some simple math again. At a total household income of $100k, you’d be grossing $8333.33 per month. Multiply by .28 for an estimated allowable monthly mortgage payment of $2333.33. This number is what the mortgage industry says you can afford as a maximum monthly payment. What matters is what your household is comfortable paying, but the 28% will give you a starting point for discussion.
- Understand PITI: Principle Interest Taxes Insurance. Your actual monthly payment will consist of payment toward the principle, interest, property taxes, and home owners insurance. The 5th possible factor in this equation is PMI, or private mortgage insurance. If you are able to put a 20% or more down payment into the purchase of your home, you will forego this additional cost. If you finance 100% of your home purchase, or put less than 20% down, PMI will contribute $50-80 per month (on average) to your monthly payment. Nationally, average annual property taxes are $3500 and average annual homeowners insurance run about $481. Each of the previous two numbers divided by 12 will tell you how much taxes and homeowners insurance will add to your total monthly payment.
- One of the best pieces of advice I can share is to meet with a lender before you begin the home search process. When friends call to begin their home search, the first question I ask is, “have you been prequalified for a home purchase by a licensed mortgage pro?” This is one are in which the cart definitely needs to follow the horse.
Call me – let’s chat about your Real Estate needs. I can refer you to several licensed, experienced mortgage professionals, and as always I am happy to assist with all of your Real Estate buying and selling needs.
Happy to be at your service,