Are you considering investing in the American Dream? Great idea! You may even have your eye on a certain
home that is currently on the market for sale. Let me reassure you that buying
a home is a great move for many reasons. But before you get too far you need to
make sure you qualify for a mortgage, unless you are going to be paying cash! But how much can you qualify for?
Before making an offer on a home you will want to know how much purchasing power you bring to the table.
In this write-up I will show you how lenders will determine your
potential purchasing power by using a
set of debt-to-income (DTI) ratios that will tell them your pre-approved max loan amount. The DTI lender guidelines were put into place by financial institutions for most
common types of mortgages and are geared toward protecting the lender’s overall
risk. (You will also need a credit score
of at least a 580 to qualify for
most mortgage programs. Max DTI’s are for those with better credit & assets.)
The
benefits of homeownership are abundant, from stability and wealth
growth to responsibility and pride of ownership. Knowing how much you can
afford will help you decide if
buying in today’s market makes financial sense for you today or if you should
wait.
There are two (2) types of DTI ratios that lenders will use to determine your max loan amount. Both DTI ratios use your monthly gross income amount. These two
(2) types of DTI’s are called back-end and front-end DTI ratios.
The back-end DTI ratio
tells the lender what your max amount of
debt payments can be each month. (Typical
monthly debt payments might include: car payments, credit card payments,
student debt payments, and your new home payment combined.) The front-end DTI ratio tells the lender
how much your max home loan payment
can be each month. (Your current monthly debt
payments will lower your possible monthly payment for a home, which in turn
lowers your max loan amount. Paying
off debt will increase your max loan
amount.)
Now that we know what DTI
ratios are, and how important they are in determining your max loan amount, let’s go over the numbers the lender will use to determine
your purchasing power.
The first thing that needs to be done is to take your gross yearly income and divide that
number by 12. That is your gross monthly income amount. Based on FHA type financing guidelines your back-end
DTI can be no more than 43%-56%
of your gross monthly income, depending
on certain contributing factors. If you use Conventional type financing, you may be able to use up to 45%-50% of your gross monthly income. (Should you use FHA or Conventional
financing? The answer will depend on many factors that we can discuss at
another time if you’d like.)
After figuring your back-end
DTI ratio the lender will make sure your monthly mortgage payment is not
exceeding the front-end DTI ratio guidelines.
Some lenders want to see your front-end
DTI ratio up to 31%, but many
will allow you to go up as much as 43%+
for FHA and Conventional type financing.
OK, so let’s say the home you have your eye on is listed for $275,000 and you make $75,000 a year. (If you are buying with a spouse or significant other, you can add their
gross annual wages to yours. You will
also need to add their monthly debt payments.) When dividing $75K by 12 that gives you a gross monthly
income amount of $6,250.00.
Using that gross
monthly income amount, and say you use FHA
type financing (3.5% minimum down payment
required), you can have a back-end DTI
amount between $2,687.50 - $3,500 (43%-56% max debt payments per month), and a front-end DTI amount between $1,937.50
-$2,687.50 (31%-43% max home payment per month).
If you have current monthly debt payment’s you would now
subtract those from the back-end DTI
amount above… or you can wait to see what your estimated monthly payment will
be and add the payments to that. For the purpose of this example let’s assume
there are no other monthly debt payment’s to worry about.
Now that we know what your max front-end and back-end DTI’s
can be, we can go to www.BankRate.com
and use their Mortgage Calculator. We
then plug in a purchase price of $275,000, plug in the down payment
amount of 3.5% or $9,625 for FHA type financing, use the default interest rate (4.88% today) and then hit calculate. That
gave us an estimated monthly payment, for your principal and interest, of $1,405.19.
Now you still need to add your monthly
homeowners insurance amount, your monthly
real estate tax amount, and because we are using FHA you will have to add in your monthly mortgage insurance amount to get your final monthly home payment.
For the sake of argument let’s say the taxes are $2500 a year, your insurance
is $1,500 a year and your PMI is $188 a month. That adds an additional $520 to your monthly principal
and interest payment, for a grand total of $1,925.19 per month.
Great news! You WOULD
qualify for a purchase price of $275,000
based on your DTI ratios if you made
$75,000 a year.
Ok, so now you know what debt-to-income
ratios are, and how they affect how big of a mortgage you can qualify for.
Are you ready to get pre-approved? It will cost you absolutely
nothing to confirm your purchasing power.
The lender will also need to verify your income and confirm your credit score
is over 580. I’d say it is pretty much smooth sailing after that, but I must be
honest. Buying a home may be one of the most stressful life events you will
encounter. If you have a good Realtor® they will
help reduce the stress level by looking out for your best interests.
If you are considering buying a home let’s talk about how
much purchasing power you have. Call
Alex to discuss further at 941-822-1519.
The Sarasota Native Group® is made up of full-time agents; this is not our retirement career nor is this a second job while also waiting tables. Collectively we have been full-time real estate agents going on 15 years. Being born and raised in Sarasota we know the area and the market very well.
On average The Sarasota Native Group® has helped customers save 3% off the list price (or $3,000 for every $100,000) using our years of negotiating experience and knowledge of the local real estate market. (This does not include helping buyers save money by recommending trusted service providers in the area. Our contacts become your contacts.)
Are you not seeing your dream home on the market? Contact us to discuss the possibility of having our team target off-market homes that have high selling potential that match your specific criteria. We only provide this service to committed customers because of the time and effort we put into finding the home of their dreams.
The Sarasota Native Group® will negotiate to get you the best deal possible and we would be delighted to work with you and anyone you know who is currently looking to purchase a home.
Contact Us today!
The Sarasota Native Group® | www.TheSarasotaNativeGroup.com
2000 Webber St. Sarasota, FL 34239 | 941-822-1519
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