The desire to own a home in America is an important part of the culture. Aside from the practical reasons behind home ownership, many individuals view owning a home as a symbol of success, regardless of how much the home costs.
Whether or not a person is able to qualify for a mortgage is a function of their credit rating and simple math.
Potential home buyers need to ask; How much mortgage can I qualify for? In order to answer this question, it is highly recommended that they seek a pre-approved loan amount prior to looking for a home.
By going through this process with a lender, prospective home-buyers will save time and target the right home values.
Types of Mortgage Loans
There are five common types of mortgage loan programs available to buyers.
- Fixed Rate – This type of loan carries a constant (fixed) interest rate for the term of the loan with payments amortized over a specified period (usually ranging from 15-30 years).
- Adjustable-rate (ARM) – The initial rate begins lower than a fixed rate loan. After specified periods of time, the rate is adjusted based on current market rates. Many times, the rate is tied to a specific index. The payments on this type of mortgage will fluctuate as the rate changes.
- FHA – This is a government sponsored loan program that provides competitive interest rates and low down payment requirements for individuals who may not qualify for a conventional fixed rate or ARM loan.
- VA – This is a government sponsored loan program designed for active and retired military personnel. The rates are very competitive and the down payment requirement is low to none.
- Balloon – This is a fixed rate loan where the payments are kept low until the balloon period ends (usually 3-5 years). At that time, the entire principle is due and payable.
Using a Mortgage Approval Calculator
There are online mortgage calculators that will answer the question: How much will my mortgage be?
The first step is to determine how much of a mortgage payment lenders will allow. To do that, individuals can use the following formula:
Gross monthly income – monthly expenses (excluding rent or mortgage payments) = Available Cash * maximum allowable % (see table A) = Maximum monthly mortgage payment allowable
For individuals with fair credit, use 36%.
For individuals with good credit, use 42%
For individuals with excellent credit, lenders will allow the number to exceed 42% in many cases.
Once a person knows the maximum monthly payment that lenders will allow, they can use a mortgage calculator to find the maximum loan amount they can expect to receive.
All they need to know is the down payment requirement, current interest rates, local property tax rates, PMI rates, and the loan term they want.
By manipulating this data while using the mortgage calculator, they can determine both the loan amount and the home value that falls within their range.
Other Ratios Used By Lenders
After a targeted loan amount has been determined, the prospective borrower may want to check other ratios used by lenders. Another key other ratio that lenders pay close attention to is the “Debt to Income” ration. Most lenders require that monthly payments on long-term debt (exceeding 11 months) fall below 35% of total monthly income.
Equipped with a qualifying debt to equity ratio plus a maximum mortgage target, individuals have the basis for finding a home they stand a decent chance of being able to afford.