First time home buyers:
Determine how much debt can you afford
Take a realistic look at how much future income you anticipate to have and how many expenses you expect to incur. Remember, the lender will tell you how much you are qualified to borrow, not necessarily how much you can afford. Only you know how much you can comfortably handle, what your other expenses are, how much you need to save and what kind of lifestyle you wish to maintain.
Lenders use the monthly payment on a property to determine a borrower’s qualifications. The payment includes principal, interest, property taxes, and insurance sometimes called PITI. Private mortgage insurance and if there is a California Home Owner Association dues also known as HOA dues they must also be included in the calculation. This debt to income ratio is called the up-front or front end debt to income ratio.
For the FHA, both an Up Front Mortgage Insurance Premium and Monthly Mortgage Insurance are also included in the front end debt to income ratio.
Lenders in California also use another ratio in qualifying borrower income. The back end ratio or housing ratio is quoted as the total monthly debt payments divided by the borrower’s gross monthly income.
The overall qualifying ratio is calculated by adding the housing expense plus all other credit debt divided by the borrower’s gross monthly income. To keep it simple, add the front end debt and other debts like car payments, credit card payment, school debt and the like. But not bills like electric, water, cable tv, phone and the like.
The back end accepted housing ratio used by the lenders in the past was 33 percent. This indicates that a borrower’s monthly housing payments should not exceed 33 percent of his or her gross monthly income. In many cases today, a quality mortgage broker can find a lender up to 50 percent. It is not ideal to have this high of a debt to income ratio but with California housing being so expensive, this is the only way many Californians could get a housing loan.
Lenders use these debt-to-income ratios to determine how much a person can borrow. Many times this is the first step in understanding the amount a borrower could get from a lender.
CLA mortgage brokers have the experience and network to find the best lender for most people. For more information to get pre-approved, check out Mortgage Pre-approval
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