SACRAMENTO, Calif. (Inman) -- The easiest way to get pre-qualified for a home loan is to call a loan agent or mortgage broker and make an appointment to review your financial situation. Here's how a lender will look at your finances to determine what price house you can afford.
Lenders usually don't want your monthly housing expense to exceed 28 to 30 percent of your gross monthly income. Crunching the numbers
The second ratio that lenders use is the ratio between your total monthly debt (housing expense combined with other debts) and your gross monthly income. The lender will tally your outstanding debts and calculate the minimum amount required each month to pay back these debts. Your debts will include bills that won't be paid off within the next few months, such as car payments, student loans and charge card accounts.
Lenders usually don't want your total monthly debt to exceed 36 percent of your gross monthly income. The lender will multiply your gross monthly income by 36 percent, then subtract your monthly debt obligation from this amount. If the balance is equal to or larger than the maximum housing expense figure calculated above (using 28 or 30 percent of your gross monthly income), you won't have trouble qualifying. If the balance is less than that figure, this means your debt level is high and the
lender won't qualify you for as large a loan.
The price home you can afford also depends on the amount of cash you have available for your down payment and closing costs. Closing costs vary from one area to the next but they can run about five percent of the purchase price. The lender will subtract an amount to cover closing costs from the cash you have available. The balance will be added to the loan amount you qualify for to determine the price home you can afford.
One way to increase your purchasing power is to reduce the amount of debt you are paying off before you attempt to qualify for a loan. This can be accomplished by paying debts down or consolidating high-interest rate debts into one lower interest rate loan. Another way is to choose an adjustable rate mortgage (ARM). If your ratios are marginal, talk to a Portfolio lender. Portfolio lenders don't sell their loans on the secondary money market, so they can be more flexible in their loan qualification guidelines.
Your income and debt are just two factors that a lender will consider in qualifying you for a home loan. Your credit record, employment history, the property appraisal and title to the property will also be examined by the lender before you'll be given a loan.
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