If you got a preapproval from a mortgage loan broker but you think that your preapproval is not enough because you want to buy a bigger house, you need to let your mortgage broker know. The reason your mortgage broker gave you a predetermined mortgage loan amount is because you told him the amount of income you make and the amount of down payment you had to put down on a home purchase. If you need a higher value home, your mortgage loan broker can see the types of options you have in trying to maximize the amount of mortgage loan you can afford.
What determines whether you qualify for a larger mortgage loan?
What determines the amount of mortgage loan a borrower can get approved for is based on the borrower’s credit scores, the borrower’s down payment, the borrower’s employment history, and most importantly, the borrower’s debt to income ratio. Most mortgage koan lenders want to see a 28% front end ration and a 36% back end ratio. The front end ratio is the amount of your monthly housing expenses compared to your monthly gross income. For example, say your principal and interest payment is $600.00, your monthly property taxes are $200,00 and your homeowners insurance is $200.00. Your total housing expenses are at total of $1,000.00. If you have mortgage loan insurance and association fees you would have to add those figures as well to your housing expenses. You then take this figure and divide it by your monthly gross income. Let’s say your monthly gross income is $5,000.00. If you divide the $1,000.00 monthly housing expense by your monthly gross income of $5,000.00, you get a front end debt to income ratio of $20%.
Debt to Income Ratios
The back end ratio is computed by comparing your total monthly debts to your monthly gross income. Your monthly debt will include all of your monthly housing expenses PLUS all other expenses such as minimum monthly credit card payments, automobile payments, student loans, child support payments, and any other monthly obligations. Say your other monthly payments are $1,000.00. So
what you do to calculate the back end ratio is take your monthly housing expenses of $1,000.00 and add the rest of your monthly debt obligations of another $1,000.00 and get your total, which is $2,000.00. Take $2,000.00 and divide it by your monthly gross income of $5,000.00 and that yields your back end ratio of 40%.
Most mortgage loan brokers will probably maximize your housing ratio and back end ratio at no greater than 28%/40%. However, depending on the type of lenders the mortgage loan broker has as correspondence lenders, some may increase the back end ratio as much as 60% loan to value. Talk to your mortgage loan broker and see if he can have a lender that can extend the debt to income ratios. A home buyer mortgage applicant can use overtime income as long as he or she had consistent overtime for a period of the preceding two years and the probability of future overtime looks promising. If you are on social security and you are not taxed on your social security income, your social security income can be grossed up by 25%. For example, if your monthly social security income is $1,000.00 per month, you can increase that income by 25% to yield your monthly income to $1,250.00 gross monthly income. Another way where you can get more buying power on your new home purchase is to lower you debt to income ratio by eliminating or reducing your monthly expenses by paying down or paying off your monthly debt obligation such as credit cards, student loans, or auto loans. Eliminating a $250.00 monthly automobile payment will get you an extra $70,000.00 worth of housing buying power.
I am a licensed mortgage loan broker in Illinois and Florida and can help any home buyer in getting them a mortgage approval. I have correspondence lenders that will grant a mortgage loan approval to borrowers with up to 60% debt to income ratio. If your banker or mortgage loan broker cannot help you, please call me or email me at www.gustancho.com .
Gustan Cho, NMLS ID 873293