Affordability Assessment

How Much House Can You Afford?

Stop and pay attention before falsely believing the number a simple mortgage affordability calculator spits out because far more detail is required before determining how much home you can afford.

Discover How to Quickly and Easily…

  • Adjust Your Expectations Because of New QRM Rules
  • Maximize How Your Income Counts
  • Diminish the Importance of Your Debt
  • Increase Your Chances of Getting Full Approval
  • Learn what each number in the home affordability equation means so that you can set yourself up for success

Laws can be confusing, can’t they? New Qualified Residential Mortgage (QRM) rules have made attaining a larger home easier if you have more debt, but more challenging because lenders must meet new qualifications. The bottom line is that these new regulations lay out what you lender cannot do, and what you must do to qualify for a mortgage. While the government is now allowing you to have a maximum “back end debt ratio”, which we will talk about in a minute, they will also require you to have a minimum FICO score, and lower how much you can have for your monthly payment based on your income. Are you ready for the numbers?

If you’re wondering how much you can afford for a house, you’ve come to the right place! As a professional Mortgage Consultant you might imagine that I love numbers, but the truth is that while I am capable of calculating how a lender will allow you to take out the largest mortgage for the lowest monthly payment, my main goal is to provide you with the answers you need by encouraging boundless communication. That’s why I believe it is so vital for you to understand how much you can afford beyond simply plugging the numbers into a calculator. Stick with me, and I promise this math won’t hurt. Besides, I grade on a curve!

Step #1: Maximize Your Income

Mortgage lenders begin determining what to lend you by looking at your gross income, and your net income. This is where many people figure out that it might be better to report with honesty on your taxes. Let’s say you make $75,000 a year at your day job, but your hobby pays you cash income of $15,000. If you only report the income from your day job you are cutting back what you could take out by nearly 20%.  Don’t worry because most lending institutions allow you to count unearned income like alimony, child support, and monthly installments from law suits and lottery winnings, bumping up how much you take in and how much you can pay for each month, which can add to the pool of how much you can afford for a home.

Step #2: Get Your Credit Under Control

As you probably already know credit plays a major role in your how quickly you get approved for the right loan. In fact, many lenders will be flexible with your income, where they will not budge with your minimum credit score. Sooner or later you will need to examine your credit with a critical eye, if you have not already. Don’t worry if you do not have perfect credit because there are options like government backed FHA loans, which seem to help lenders relax their high credit score standards in exchange for having you pay mortgage insurance. Government backed home mortgage loans are great at diminishing the importance of your debt, although many only apply to new home owners, or people who have not purchased a home in many years. Every lender is different, so if you are curious to see what you qualify for now, simply get in touch or call (562)257-5008.

Step #3: Calculate Your Debt Load to Understand How Much You Can Afford

Even if you take out a government insured loan, the numbers will need to work in your favor. Calculating what lenders will allow you to bear as your estimated monthly mortgage payment is a simple step by step process

A. Make a list of all of your monthly payments including car payments, credit cards (minimum payment), installment loans, car loans, personal debts, and anything else you are required pay monthly.

B. Cross out anything that will be paid off within 6 months or less.

C. Now look at your total gross monthly income. Take out your calculator and multiply your gross monthly income by .31 to get the total you should spend maximum for your monthly mortgage payments, taxes, insurance and HOA.

D. Now multiply your monthly gross income by .43 on your calculator. This is the total amount that your lender will normally allow you to have including all of your monthly debt load plus your mortgage payment.  Hint: You can dramatically raise this by increasing your down payment, or getting someone with money to co-sign for you.

E. Subtract A from D (D-A) to understand the maximum a bank will allow you to pay each month for your mortgage including taxes and insurance.

F. Here is a real life example for you to follow

1a. Assume you pay $1,000 a month including all monthly debt payments

1b. For the sake of keeping it simple, let’s say that you aren’t paying anything off in the next six months.

1c. Let’s assign a gross monthly income of $10,000 and suggested maximum monthly mortgage payment. $10,000 X .31 is $3,100.

1d. If you now multiply your gross monthly income by .43, you will have the amount that your lender will normally allow you to have in total debt each month. $4,300 per month.

1e. Now subtract 1a ($1,000) from 1d ($4,300) for a total of $3,300.

Now choose the lesser amount of 1e or 1c to get the total amount you can spend on on your loan including taxes and insurance, you get a total of $3,100.

If this does not seem like enough you should stop worrying because this number is not set in stone. In fact your dream home could be waiting just on the other side of the right lender, it just depends on your professional Mortgage Consultant’s ability to get you the best loan for your unique situation.

Remember, you can dramatically raise this number by offering a higher down payment, and this is just an estimation. What you can pay total depends on your interest rate, whether you have an adjustable rate mortgage, and if you have a cash and credit strong cosigner.

Many people find the math confusing, which is understandable because it is many small equations tied up into one final figure which is slightly different for every lender. If you would like help determining exactly what you can afford to spend with the best lender for you I welcome you to  get in touch or call (562)257-5008 to get the answers that help you avoid critical pitfalls today.

How Much House Can You Afford?

Determining exactly what you can afford with your personal affordability assessment today!

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