Each loan program that is available to a homebuyer has a slightly different calculation to determine whether a potential borrower will qualify for a home loan. As a general rule, a lender is looking for a house payment that includes taxes and insurance (PITI), plus any applicable Home Owner’s Association dues, to be 31% or less of borrower’s gross monthly income. The lender also requires that housing expense, plus other monthly payments, to be around 41% of gross monthly income. Items included in other monthly bills would be payments of autos, credit cards, personal loans, student loans, child support/alimony, and in some cases child care expenses. This would be what is call the borrower’s ratios and is an important part of the approval process. These ratios can be exceeded in some cases, when there other positive compensating factors to consider. These factors may include a small or no increase in housing payment, a large down payment or large cash reserves, a very positive savings history, etc.
I feel it is more important for a borrower to evaluate their own budget and determine what they can really afford, rather than just rely on what a lender can get approved for them. A potential homebuyer should closely evaluate their current home expense and how comfortable they are with that payment. They should consider how an increase in housing payments will affect their budget. They need to consider what the additional utility and maintenance costs will be on the new home, compared to their current situation. It is also important to consider whether they can afford a major repair, if needed, or how secure they would be in the event that there was a job change or reduction/loss of income. It would be wise to consult with a tax advisor as to the possible tax advantages to owning a home compared to renting. All of these things are important to carefully analyze before purchasing a home.
This article was provided by:
Gayle McCarthy
Mortgage Broker
American Pacific Mortgage
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