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What Can I Afford?
Mortgage lenders are primarily concerned with your ability to repay your mortgage on time and whether or not lending you money poses a financial risk to them.
Lenders will consider your credit history, your monthly gross incomeif salaried, or, monthly gross adjusted or net income if self employed, and how much cash you have available for a down payment. In New YorkState 20% down is considered the norm in the current lending environment. However, persons with high credit scores (above 700), andsignificant income capacity, may still qualify for loans with as little as 10% down, as long as they are:1) willing to pay higher interest rates on the 1st mortgage, and 2) pay a monthly premium for mortgage insurance required on 1st mortgages above 80%, or 3) "piggy back" the 1st mortgage with a 2nd, (higher rate, often adjustable), to avoid mortgage insurance.
So how much house can you afford?
You should schedule an appointment with a qualified mortgage banker or broker before beginning your new home search, and you should also obtain a pre-approval letter to have on hand should you decide to make an offer on a home, as this will make you much more attractive to the Seller. In fact, many sellers in the North Eastern Queens area do not even want to hear offers from buyer's that are not pre-qualified.
As a general rule of thumb, the following is how a Lender, or Mortgage Broker will calculate what the maximum mortgage amount you qualify for is:
- Take your annual salary and calculate the equivalent of 38%. For example if your gross annual salary was $80,000, 38% of that would equal $30,400, Then take $30,400 and divide it by 12 (12 annual payments). That would be $2,533.33. This figure is considered the allowable housing expense, or front-end ratio. It shows lenders how much of your gross (pretax) monthly income could go toward a monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance.
- Next lenders calculate the total debt-to-income, or back-end ratio, which shows how much of your income is used towards all of your debt obligations, including proposed mortgage, car loans, child support and alimony, credit card bills, student loans and or any condominium fees. To calculate your debt-to-income ratio, multiply your annual salary by 0.43, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.
To put things simply your monthly mortgage principal and interest payment, real estate taxes and homeowners insurance should not equal more than 38% of your annual income, and yournon housing debt payments can not equal more than 5% of your annual income for a total of 43%. (Note: if you do not have any debt you could qualify for a mortgage at up to 43% of your annual income.Depending on the mortgage program, e.g. Conforming, Non Conforming, FHA, SONYMA, etc, lenders will allow for higher "front" and "back" ratios based upon "compensating factors" including: 1) high credit scores, 2) low loan to value/high down payment, 3) significant liquid reserves, and 4) stability of employment. These variances differ from loan program to loan program. Today, more than ever, it is critical to connect with the right lender who will work to structure the financing, not just for the best rate/lowest closing costs, but for highest probability of success.
The following chart shows your maximum monthly mortgage payment and maximum allowable debt load based on your annual gross salary:
|
Gross Income |
38% of Monthly Housing Debt |
5% of Monthly Debt |
43% of Total Debt |
|
$70,000 |
$2,216 |
$291 |
$2,508 |
|
$80,000 |
$2,533 |
$333 |
$2,866 |
|
$90,000 |
$2,850 |
$375 |
$3,225 |
|
$100,000 |
$3,166 |
$416 |
$3,583 |
|
$125,000 |
$3,958 |
$520 |
$4,479 |
|
$150,000 |
$4,750 |
$625 |
$5,375 |
|
$175,000 |
$5,541 |
$729 |
$6,270 |
|
$200,000 |
$6,333 |
$833 |
$7,166 |
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