1. Lenders use two simple ratios to determine how much money you can borrow to refinance your home.
Step 1: Write down your total gross pay per month, before deductions for taxes, insurance, etc.
Step 2: Multiply the number in Step 1 times .28 (28%). This is the amount most lenders will use as the guideline for what your total housing costs (principal, interest, property taxes, and homeowners insurance, or PITI) should be. Some lenders may use a much higher percentage (up to 35%, but most people cannot realistically pay this much towards housing, and Ratio #2 often makes this a moot point).
Example: The combined income for you and your spouse is $70,000, or $5,833 per month. ( $5,833 x 28% = $1,633.) Your total PITI should not exceed this amount.
Debt to income
Step 1: Write down all of your monthly debt payments that extend for more than 11 months into the future, such as car loans, furniture or other installment loans, credit card payments, student loans, etc.
Step 2: Multiply the number in Step 1 times .35 (35%). Your total monthly debt, including what you expect to pay in PITI, should not exceed this number.
Example: You and your spouse have credit card payments of $200 per month, car payments of $183 and 350, student loan payments of $100 and $75, payments of $100 per month for furniture you purchased on a revolving credit account and will pay off over a two-year period, for a total monthly debt payment of $1,008.
Multiply your total monthly income of $5,833 per month times .35 (35%). Your total monthly debt, including PITI, should not exceed $2,041. Subtract your monthly debt payments of $1,008 from $2,041. This leaves you $1,033 a month for PITI.
If you are considering going into business for yourself or starting a new company, don’t! It is best to wait until your loan has gone through before making such a move.
Making a major purchase at this particular time is not a good idea, because it increases one’s debt to income ratio. If, for example, you were to add a $300 monthly payment on top of your current bills, you will now qualify for a mortgage payment that is $300 less. Any unnecessary major purchase should be made after your loan has been approved to determine what additional expenses you can take on.
The Mortgage Terms Matter
Most homeowners get a 30-year mortgage at whatever the current interest rate is. Many borrowers don’t question this type of setup. For example, they could get a 15-year loan and get out of debt that much sooner. But even for 30-year mortgages, there are lots of differences. Between VA, FHA, and conventional homeloans, you have several options to choose from. For example, sometimes you can lower the interest rate by prepaying points.
If you’re flexible when it comes to your monthly payment amount, then it might make sense to take a look at the total amount you will pay over the life of the loan. Obviously, you don’t want to pay more than you have to. Similarly, if you don’t have a lot of money for a down payment, then you might want to look into VA or FHA.
Your Lender Works for You
Your mortgage lender is working for you. Therefore, they should do their best to help you qualify for the loan you want. But they should not try to get you to qualify for a bigger loan than you can afford. It’s also helpful if your lender helps you find ways make the mortgage work foryou.
For most people, it’s difficult to come up with a big down payment. In that case, a lender can help you find ways to make the loan work. You might also ask the seller to pay for some or all of the closing costs to reduce your out-of-pocket costs. If your credit score is the problem, your lender could point you in the right direction and advise you how to improve it, too.
Your Lender Should Be Responsive
Qualifying for a loan can take some time. But once you’re pre-qualified and you made an offer on a home, you want things to progress quickly. Professionals in mortgage lending in Catlin Illinois should be able to close on your loan within 45 days or less. The longer it takes to close on the loan, the more impatient the seller will get. After all, they’re responsible for mortgage payments until you sign on the dotted line.
4 Tips to Get Through The Mortgage Lending Process
- Get Your Paperwork in Order
Lenders require a lot of paperwork. Not only will you need your paycheck stubs and W-2 forms and tax statements, you’ll need copies of your bank account statements, stock holdings, and more. If you’re self-employed, you may also need to provide additional proof of income. Before you fill out a mortgage application, check with your preferred lender to find out the exact types of paperwork you’ll need during the process. Keep these documents nearby because it’s more likely than not that you’ll need to send multiple copies on a whim.
- Figure Out How Much You Can Afford
The lender will give you a figure of what they will lend you based on your application. Often, this figure is higher than what you should be spending on a home. Just because you’re approved for $250,000 doesn’t mean that’s what you should spend. Take a serious look at your budget and determine how much of a monthly payment you can afford after you take out all your expenses. Ideally, you want to keep your mortgage payment between 25%-35% of your monthly take-home pay.
- Work on Building Your Credit
Is your credit in bad shape? While most people with sub-par credit can find a lender, the interest rate, points, and down payment needed to secure a loan can be quite expensive. If you have questionable credit, spend some time going over your credit report and fixing errors. If errors aren’t the problem, but your payment history has marred your report then you may need to give it time. Instead of buying a home at the moment, you may want to work on paying bills on time and increasing your credit score. Well-qualified buyers get the most competitive interest rates and can afford more house for less money.
- Don’t Make Big Purchases
Did you get pre-approved for your loan? That’s great. Pre-approvals make you look like a serious buyer and strengthen your offers. Unfortunately, a pre-approval can quickly turn into a denial if you begin making large purchases that mess with your debt-to-income ratio and credit score. Avoid making big purchases that require credit before and during the lending approval process. Hold off until after your loan is closed and you have the keys to your new home in your hands.