A: Deciding how much house you can afford is a personal decision. Many factors come into play. How much can I borrow? How much can I put toward my down payment? What size monthly payment can I afford?
The two biggest elements in solving this question are your debt-to-income ratio, and the amount of down payment you will put down (or equity if a refinance).
To calculate your debt-to-income ratio, add up all of the monthly debts (excluding utilities), then divide that final number by your gross monthly income. This will determine the most you can afford to pay per month and give the underwriter the maximum loan amount.
If you prefer to get a 30 year mortgage, a lower down payment is more likely (in some cases zero down payment) as the monthly payments are amortized over 30 years. Having said that, a 15 year mortgage comes with a higher payment and less interest for the life of the loan but since it is calculated over 15 years, the payment is higher so a larger down payment may be in order.
Q: What if I don’t have the down payment requirement?
A: Your down payment source is not always just what you have in the bank, savings or money market accounts. Another method to cover or partially obtain a down payment is with gift funds. Family members such as parents, grandparents and other relatives in many cases are willing to assist by providing a cash gift for your home purchase.
Other options are down payment assistance programs from local charitable groups. And, for those who have significant assets held in brokerage accounts yet are cash poor, there is a pledged asset program instead of liquidating your account.
Q: I am purchasing the property for much lower than the appraised value, will I be able to use the difference as my down payment?
A: This a good question yet there haven’t been programs like that for quite some time. To be clear, if you are buying a home, the lender has to use the lesser the sales price or the appraised value to determine your down payment. Fortunately, there some lenders who will refinance your property AFTER 3-6 months and use the appraised value even if is higher while most lenders wait another 12 months.
Q: How is rental property income verified?
A: If you own rental properties, your loan consultant commonly requests that you provide them with the most recent year’s federal tax return to verify the income of the rental property. Underwriter’s will review the amounts on Schedule E to assess the property’s income minus expenses except for depreciation. Since depreciation is not counted against your rental income you write it off and bring down your personal income. Always confirm with a tax advisor.
If you owned the rental property less than a year, a copy of lease agreement may be requested by the lender to make estimates.
Why is Pre-Approval Important?
It’s extremely important to discuss your situation with a licensed mortgage consultant, even if you haven’t found the house you want. Nowadays, neighborhoods with high demand have multiple offers so you must have all your ducks in a row or you will be passed over for a more qualified buyer.
Furthermore, most realtors won’t work or represent buyers who have not been pre-approved for financing.
A licensed mortgage consultant can quickly figure out the maximum loan amount you can get, by asking a few questions and then verifying the information with an underwriter. This process lays out specifics for your present financial status; your monthly debts, income, profession, and money for a down payment, in addition to a few other items.
You should get a Pre-Approval Letter, (not the lesser Pre-Qual letter which has little value) which says that the lender has verified your income, assets, and job information and now only needs a property to lend on for a set dollar amount.
As you can see the benefits of going through the pre-approval process early far outweigh not doing so and give you much better odds to get into the home you saw with a realtor and would like to pursue. GET APPROVED TODAY BY CONTACTING.