How Much Can You Afford?
Pivot Lending Group looks at two very important factors when considering a mortgage for approval: the effective debt-to-income ratio for the loan file and the overall ability to repay. The effective debt to income ratio is calculated by considering all sources of gross (not net) monthly income, analyzing those income sources for eligibility under published guidelines, and finally expressing that approved income amount as a percentage of your total monthly debts. The ability to repay guidelines are published within the federal registry, should you choose to review them. In general, the rule requires lenders to look at 8 factors when determining a borrower’s ability to repay a mortgage loan.
- Current and reasonably expected income and assets.
- Current employment status.
- The monthly payment for the transaction in question.
- The monthly payment on any loan closing simultaneously.
- Any other expenses tied to the new home or mortgage. (HOA dues for the home being purchased)
- Current debt obligations, alimony and child support.
- The monthly debt to income ratio or residual income.
- Credit history.
From a consumer perspective, there are two ways to look at this question. One is based on the guidelines that are written by people that are trying to regulate all lenders in the US, while the other is based on a very personal decision about your budget and your future. Although both are applicable, the monthly payment that results from closing on a home loan is not something people who write guidelines have to deal with. The payment is yours and yours alone to make, but it is our job to ensure that this decision is made with every fact lined up. Your comfort level is the #1 priority.
1) How much are you able to qualify for?- Qualification means that all the income sources you have listed is appropriately and is eligible to be used. For example, earnings from bonus or commissions are not eligible to help you qualify unless you have a minimum 2 year history of having that income as part of your monthly pay. This fact can be discussed at great length and in some cases, exceptions can be made. For the purpose of this perspective, ask yourself ask yourself what income sources you are currently earning and how consistent this income will be. Is the income stable and expected to continue? Are you looking to change careers in the near future?
2) How much of a payment can you comfortably make each month? This is the MOST important question.
- How much can you afford on a monthly basis? Because lenders use gross income, the subtraction of gas, grocery’s, health insurance and other deductions that do not report to credit are not considered in calculating the effective debt-to-income ratio for a mortgage file. This means that you and you alone know what you can truly afford.
- What income sources do you have that cannot be used to qualify, but will still be used to help make the payment? This question is important because we may be able to approve you at a higher debt-to-income ratio (up to 50% in some cases) than you would normally be comfortable with, but the presence of other income will help you and the lender know that you are able to comfortably make the payment.
Please give us a call so we can help you through the qualification process. If you;d like to explore a bit yourself, please utilize the “How much house can I afford?” calculator.