The first step you should take if you are considering buying a home is to have a mortgage professional help you determine how much you will qualify for. To follow are the typical steps and explanations that I go through with my clients. I will provide a sample assessment for a hypothetical client.
Firstly, I ask a series of questions that allow me to run some initial numbers. In red, will be the hypothetical client’s responses.
- What purchase price range are you considering? $800k-$1MM
- How much is your down payment? 20% down
- Are you looking for a single family home, condo or townhouse? Single-family home
- Will the home be your primary residence? Yes
- What is your current base salary (gross)? $160,000
- Do you know your credit score and/or range? It should be excellent
- What are the minimum monthly payments due on anything that will show up on your credit report (car loans, student loans, credit cards…)? $450 car payment; credit cards paid off monthly; no student loans.
With the answers to my questions, I can now run numbers.
At the upper range of this buyer’s limit of $1MM purchase, we have an $800k loan amount and will assume a 4.5% interest rate (this is not an exact rate quote) –
- Mortgage: $4053.48
- Property Taxes: $1041.67
- Homeowners Insurance: est. $100
This is their housing debt. Total of $5195.15 plus their other installment and revolving debt (car loan of $450) = $5595.15 total debt obligation.
We divide this debt figure into monthly gross income, which is $13,333. So $5595.15 / $13,333 = 42.34% qualifying ratio (also called the Debt-to-Income ratio).
For a Jumbo loan amount, which exceeds $679,650 in high-cost counties, the max qualifying ratio is 43.0%, so this individual does qualify for a loan at the upper range of their desired limit.
Once numbers are run for your particular scenario and you know what you qualify for, it’s important that you digest them. A lender does not take into account your lifestyle and many other obligations you may have, such as child’s school tuition or the need to support other family members. You are the only one responsible for that total payment, so you need to be comfortable with its total obligation.