On more than occasion in 2017 I had a potential buyer tell me they thought the mortgage lenders to whom I had referred them were wrong. They made way too much money to only be approved for the price home the lenders qualified them. The lenders simply had to be wrong, and the buyers were going to explore other lenders to see what they had to say. This is the best reason to be approved before shopping for a home. I get it. We live in a 'I have the money, I should be able to spend it' society. But mortgages aren't like everyday purchases, or even cars for that matter. Let see explain why.
'My Friend Makes The Same Amount, and She Could Buy Much More House'
This is a very common complaint. Let me say this bluntly: Mortgage Lenders are not lying to you. They're not out to make you buy less home than you really can afford. They want to lend you the money you're qualified for. But you and your friend probably do not have the same exact financial picture. Is your car payment more or less expensive? How about student loans? Do you pay child support and your friend doesn't? Was it a FHA loan, conventional, USDA, or VA? All of these things and more are calculated in what's called a 'Debt To Income Ratio', known as DTI for the rest of this blog. Let's get into DTI right now.
Debt To Income Ratio
This is the magic formula lenders use to determine your purchase ability. All NMLS lenders have to abide by the same federal standards when doing these calculations. These standards include what ratios people are allowed based on their loan type. In the interest of not boring everyone, i'll just say FHA has the highest ratio allowance of any loan there is. There's back end and front end ratios, and it's best to let a lender explain those to you. So let's get into the math, and this is where you'll see why having a certain income doesn't necessarily qualify you for the home price you want.
Let's say you made $60k/yr. That's $5K/mo. Let's say the ratio for debt allowance is 50%. That means the total allowable debt the borrower can have is $2500/mo. From there, you subtract out your monthly payments for things like: car payments, student loan payments, child support, credit card payments, IRS monthly payments, and other things on a recurring monthly charge. So if all those charges add up to $1000/mo, you're left with a remainder of $1500/mo allowed for a mortgage payment. That's not even factoring in if your credit score is above the minimum requirement for the least down payment. This is exactly why no two people who make the same amount of money qualify for the same home purchase.
There's three major things not related to income which can affect your purchase ability, and ones which are something you can actually have a controlling interest over.
- Credit Score
- City in which you purchase
- Age of home
Your credit score is one of the determining factors in the interest rate on your loan. The lower the interest rate, the lower the payment, which means the more expensive house you can purchase. The city in which you purchase can have a tremendous effect on your purchase ability for one simple reason: taxes. Every city has different tax rates, which are a part of what's in your mortgage payment. The lower the taxes, the more house you can purchase and vice versa. Lastly, the age of the home has a part to play on your insurance. Insurance is also factored into your monthly payment, which affects your purchase ability. The newer the home, the likelihood of your insurance being cheaper.
If you're looking to buy a home, just keep this in mind when applying for a mortgage. The lenders will be able to analyze your financials and be able to tell you what to do in order to get you the purchase price you want.
So if you're in the market to buy a home, Contact Me Today! I can help you get set up with mortgage and insurance people to make sure you're able to buy a home and have the best coverage.
Ready to buy? Schedule a phone call with me to get the process started!
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You can also get a copy of my Home Buyers Handbook when buying to learn about the process!