Working with a Home Mortgage Lender to Find Out How Much House You Can Afford

For anyone who is purchasing a house, whether it is a first home, a vacation home, or a new home because circumstances have changed, the first and most critical question that should be asked early on in the relationship with a home mortgage lender is how much house one can afford. There are several factors that must be taken into consideration to determine the size of the mortgage one can handle. At the same time, one must be aware that the mortgage industry is currently going through some turbulence. Because of some of the defaults and restructuring of loans that have occurred, your home mortgage lender will likely be taking extra precautions when qualifying borrowers.

Before we dive deeper into the subject, it is important to make sure that readers only use the information provided in this article as a starting point, as many lenders are changing their requirements as the mortgage industry adjusts. Make sure you ask your home mortgage lender specific questions before purchasing a house.

The Four Basic Rules

A home mortgage lender will take into consideration four basic rules that will help a borrower interested in taking out a mortgage and purchasing a house:

--The income of the borrower (or borrowers if more than one person is purchasing the house) --The borrower's debt to income ratio --The down payment amount that a borrower can afford --The monthly payment that the borrower can afford

Income

First, someone purchasing a house must determine his gross monthly income. This number will include not only the salary of the borrower or borrowers (depending on how many people are financing the mortgage) but also any other income. This may be alimony or child support, income from interest or dividends from stocks, or commissions from a job. The borrower should be able to present documentation for all of his income in order for the home mortgage lender to count it. This number will be the basis for all other calculations regarding the mortgage.

Debt to Income Ratio

Once a borrower has determined his income, the home mortgage lender will then want to know his debt to income ratio. This is essentially what it sounds like - how much debt the person who is purchasing a house has compared to his gross income (before taxes, rather than net, which is after taxes). Debt includes such things as an existing home payment, a car payment, a student loan, a credit card payment, or other liabilities.

A home mortgage lender will want to make sure that a borrower's debt to income ratio hovers around 50 percent, with numbers like 28/36 (the first number equals the percentage of income the borrower can use toward housing costs, the second number equals the percentage used toward housing costs plus other recurring debt). Anything significantly larger than these numbers will naturally lower the amount of mortgage that the borrower can afford when purchasing a house. There are various calculators available online that will help you determine this important figure, such as http://www.usnews.com/usnews/biztech/tools/modebtratio.htm from U.S. News and World Report - you can simply plug in the relevant numbers, and the application will let you know the percentage.

Monthly Payments

Next, the borrower should inform the home mortgage lender of how much he can pay on a monthly basis. If the borrower is currently renting a home or apartment, he can base that figure on his actual monthly expenses. The borrower should also factor in what percentage of his income (more on that figure in a moment) he would feel comfortable spending on his mortgage when purchasing a house. This figure should also include any taxes and association fees that might be required of the borrower as well.

Down Payments

Down payment amounts are becoming more of a major concern as every home mortgage lender has started to take more time to make sure people are being funded that have the ability to pay and have a vested interest into keeping their property over the long term. Gone are the days of being automatically offered 100 percent financing, which meant that borrowers did not have to put any money down when purchasing a house. Such borrowers are now seen more often as a liability on the part of the home mortgage lender, who is taking a risk by not requiring a down payment. On average, borrowers will now see requirements ranging from 5 percent to 20 percent, depending on the credit score of the borrower.

The borrower should determine how much of a down payment he will be able to make when purchasing a house based on his savings and his credit. He can then discuss this figure with the home mortgage lender, who can use this information to determine the size of the mortgage that the borrower can afford.

In addition, the size of the down payment will affect how much the buyer pays in closing costs. Depending on how much of a down payment one can provide, the closing costs for purchasing a house will average about 3 percent of the remaining balance of the loan. For example, if the purchase price is $143,000 and the buyer puts down a 10 percent down payment, the closing costs would be $3,861. The home mortgage lender will be able to further help with these calculations.

Conclusion

Taking into consideration the criteria already mentioned, the underwriting guidelines for each home mortgage lender will vary. Some will be stricter than others when certifying the ability of the person purchasing a house to be able to pay. This is simply the result of lenders having had problems with borrowers in the past, and it is just one of the hoops you must jump through in order to get a mortgage. If you do the math before you start your home search or start talking to a lender, the process of purchasing a house will go much more smoothly and before you know it you will be handed the keys to the home of your dreams.

Article Source: http://www.realestatepropertyarticles.com.

About the Author:
Neil A. Terc is the president of YourKasa.com, a unique, interactive website that assists home buyers and sellers with services to help them reach those goals. Customers are able to search property listings from both realtors and homeowners and get assistance from local real estate agents as well as receive mortgage guidance for their desired financing. Through the website, Terc also offers advice and discusses the common challenges that face new homebuyers and sellers. For the last seven years, he has been purchasing, selling, and leasing properties and is an accredited real estate professional. To see some of the website's real estate listings online, visit www.yourkasa.com.