How Much Home Can
While the value
of the property you buy plays a part in determining how much you can
borrow, the bulk of the lender's analysis is based on you as a potential
customer. This analysis is based on three main categories:
debts, housing expenses)
is the real estate industry's way of understanding the financial
resources you have available for buying a house.
To determine your borrowing capacity, the lender measures
your total income, subtracts your debts and housing expense.
They then use these numbers to create ratios (called Front and
Back ratios) to rate your finances and decide what mortgages you
may believe you can live on Ramen noodles, walk to work and give
up cable TV in order to cover that huge mortgage payment, but
the lender wants to be sure you are not overextending yourself
and running the risk of foreclosure.
income that is consistent can be used to help you qualify for a
loan if it can be verified. If you are a financially-aware
consumer, with low consumer debt and stable spending habits,
income is probably the most important factor determining your
from the banker's perspective, you should have five years of
continuous employment in the same field, with at least two years
at your current employer. But this is an ideal. Recently
employed people can still get a mortgage.
income is the key to mortgage nirvana, and just about anything
counts. Part-time salary, commissions, disability payments,
alimony and child support, even seasonal income that can be
proven for two years running is beneficial as long as it is
likely to continue for the next five years or so.
income history is best described as "erratic," some
lenders offer programs, but be prepared to pay more as a premium
for the risk of lending you money.
home buying purposes, your debts are defined as:
- Home equity loans, debt consolidation loans, education and
- Insurance payment liabilities
- Legal judgments like alimony and child support
It is hard to overemphasize the importance of reducing your
consumer debt before applying for a mortgage. Lenders will
often reject a loan application from even a high-income
borrower if he or she has a lot of consumer debt.
have the cash in an account or investment that pays less
interest than you are being charged for your loans, and this
is usually the case, you should withdraw the money and use it
to pay off your debts.
But again, you should consider the interest rate
consequences. Mortgages generally have interest rates under
10%, and the US government rewards housing debt by allowing
you to deduct your property taxes, and home mortgage interest
payments (up to $1 million borrowed) from your annual federal
means that your mortgage is usually cheaper than your credit
cards, and if you are funding the down payment yourself, you
will do better to pay off the consumer debt than to try for a
larger down payment.
expense is the third calculation used to determine your capacity
because the lender wants to make sure that the mortgage payments
fall within a reasonable range for your income and debt level.
years, lenders have seen patterns in buyers' income, debt and
spending levels and watched which loans ended up in foreclosure.
This led them to develop guidelines for what people can
generally afford to spend each month on their monthly mortgage
principal and interest payment, taxes, and home owner's
high down payment may balance out high consumer debt.
aspect of the home purchase that is important to lenders is the
collateral pledged for the loan. There are two monetary
measurements: the amount of the down payment and the independent
appraisal of the property's value.
the event of foreclosure, the buyer forfeits both, and the
lender expects the combined amounts to at least cover the loan.
This expectation leads to an assessment of risk, called the
loan-to-value (LTV) ratio. For example, a 10% down payment
requires a 90% loan, and therefore has a 90% LTV ratio.
appraisal is a professional estimate of a property's market
value. The lender will have the property evaluated by an
independent, licensed appraiser (though you pay for it, usually
between $300 and $1,000) to make sure it is appropriate
collateral for the loan. If the property doesn't appraise for at
least the value of the selling price, the lender won't give you
a mortgage based on that amount
down payment is that big pile of cash you personally pay to the
seller. It's the part of the purchase price not covered by
If you put down less than 20%, you'll have to pay a monthly
premium for private mortgage insurance (PMI or MI). Unlike other
kinds of housing-oriented insurance, PMI protects the lender
when the borrower defaults, which is why they're willing to lend
with less than a 20% down payment - their extra risk is covered.
There are also other ways to get help besides private
mortgage insurance. Several government programs help buyers
the case of FHA and VA loans, local lenders offer the mortgages
according to government guidelines, and the loans are then
guaranteed by the government in the case of default.
are valuable programs for people with limited funds, but they
have restrictions on the amount that can be borrowed that can
make them unworkable for high cost urban areas.
option is to find a way to share the down payment cost with
someone else - either a loan from the seller, or another bank.
So you could do a deal called an 80-10-10 - 80% mortgage, 10%
down payment, 10% additional loan.
credit aspect of the lending decision concerns your history as a
consumer. As the lender is considering giving you a large sum of
money, it's logical that they'd like to know whether you have a
pattern of paying loans back promptly.
Reports and Payment history
three main credit reporting agencies in the US: Experian,
Equifax and TransUnion. It is generally a good idea to
periodically check your credit reports to make sure they
accurately reflect your spending.
What you receive will generally be an abridged version - if
you discover multiple problems, you should get the full report
and work through all the codes to ferret out the cause.
There are also credit repair agencies that specialize in helping
you resolve credit problems. They charge a fee, but if someone
stole your wallet and has been using your social security and
credit account information on a wild spree, it may be worth it
to get professional help.
It can take several weeks or even months to resolve credit
disputes so the earlier you know you have problems and start
trying to clear them up, the better.
mortgage wisdom says that you need good scores in two of these
three if you want to get a mortgage. Balance is key - a big down
payment combined with steady income can compensate for a
less-than-stellar credit rating.