As you consider applying for home loan, it is prudent that you consider personal finances. The amount of money that you earn when compared against what you owe others will be used to establish what can be lent to you.
This is crucial because houses cost differently and you could select the one you can afford. Here is how to establish the amount of home loan you can afford.
Establish what is your monthly income
It is important that you establish the total monthly income. This should include your regular sources as well as recurring returns that you can articulately document.
Remember that if this income is not reflected on the tax returns you make every month, it cannot be used to assist you in qualifying for a loan. Some unearned sources such as lottery payoffs and alimony should also be included in the gross income.
Make sure to also include assets that produce income to you such as stocks and even real estates because they can articulately be estimated and help arrive at a figure you can comfortably repay. If you are unsure about the specific situation, it is prudent that you consult a loan officer to assist you reviewing the loan rules.
Establish your monthly debt
This should include all the obligations that you are liable to in a month. They involve installment loans, credit cards, child support, personal debt or other obligations you meet every month. If you have a revolving obligation such as credit card, take the minimum payment you make every month for the sake of this calculation.
If you have installment obligation, adopt the latest monthly payment to establish the debt load. It is important to note that you do not have to include any debt that is scheduled for completion in less than six months from the time of application. You could use the home affordability calculator to know how much you can afford.
What lenders look for
Lenders are in business and will only want to give you what will not over load you. Though many home lending institutions hold varying formulas for determining what they can give you, here are the numbers and how they look at them.
Your monthly housing obligations which include monthly insurance and taxes must not exceed 28% of the entire monthly income. If you are unsure of what insurance and tax expenses are going to be, estimate them at 15%. The remaining amount could be used for interest and principal repayment.
It is also important to note that the proposal you give for the housing expenses on a monthly basis and the entire amount cannot go beyond 36% of the total income. If it goes past 36%, your loan is mainly considered beyond what lenders will be willing to approve.
There are exceptions to this. Based on your individual status, the 28% and 36% could be overlooked. For example, if you can be able to purchase the house while making less than 80% borrowing for the entire house value. This means that you should be able to make a large down payment.
In addition, the 28% and 36% rule can be overlooked if a wealthy person is willing to act as a cosigner for you. This is because if at some point you might be unable to proceed with repayment, they can comfortably guarantee effective completion.
Look for the appropriate lender
The amount of house loan you can afford is ultimately dependent on the lender you go to. There exist hundreds of programs that can provide you with house loans in the market. Carefully review the terms of several lenders and identify the one with the lowest offer.
Make sure to carefully establish whether there are hidden charges. It is always advisable to engage a financial consultant to identify the best lender.
It is through this process that you can identify how much home loan you can afford.
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Good rundown. Banks will also waive max debt to income ratio for high credit scores. This would be for non FNMA loans though. Thanks for posting!