This article will give you a better understanding of what information is used to determine your ability to qualify for a loan. Lenders will review your income, debt, and savings information to determine how much money they are willing to lend you towards your home purchase.
Based on your lifestyle and needs, consider how much you are willing to spend on the purchase of a home. You may not be willing to invest as much of your income in buying a house as you can actually afford. See further details below about the kinds of information used by lenders to determine how much house you can afford to buy: Income, Debt, and Housing-related expenses.
Your income is critical in computing how much you can afford to pay (using current lending guidelines) for housing related expenses. Your income information is included in the debt ratio calculations. Your ability to meet the monthly Principal, Interest, Taxes and Insurance payments (PITI) and your debt ratio score can impact a lender's decision to offer you a loan.
Different loan programs have their own rules regarding the percentage of income that can be applied toward monthly house payments. For example, government loan programs such as FHA and VA have ratios that allow you to apply a higher percentage of your income toward the loan. While conventional loan front-end ratios generally run around 28%, FHA allows you to apply 29% and VA allows you to apply 41%.
This means that your monthly loan payment should be no more the 28%, 29%, or 41% of total monthly income, depending on the loan program you use or qualify for.
A lender carefully considers your debt obligations when assessing your ability to repay a loan. Your debt information is included in the PITIO (Principal, Interest, Taxes, Insurance payments and Other monthly non-housing expenses) and debt ratio calculations. Loan programs have different rules regarding the percentage of income that can be applied toward long-term debt. Your ability to meet the ratio requirements can impact a lender's decision to offer you a loan.
Government loan programs such as FHA and VA allow you to apply a higher percentage of your debt obligations towards the loan. While conventional loan debt ratios generally run around 36%, FHA and VA allow you to apply 41%. Basically, this means that your long-term monthly debt payment plus your monthly loan payment can equal no more than 36% or 41% of total monthly income, depending on the loan program.
Housing-related expenses are another category lenders consider. These expenses often depend on the location and type of home you are buying. These expenses will affect the size of the loan for which you qualify and may be one of the most critical factors in your decision to buy a home. Consider how housing-related expenses will impact your budget. The purchase of a home may increase your monthly expenses and reduce the amount of money you have remaining for other expenditures.
Typical home expenses include:
Property Tax - This expense is dependent on the location of the home. Property taxes vary by county and state. As a homebuyer, consider how this additional expense will impact your total monthly expenses.
Maintenance Costs - This expense includes anything from faucet washers to a new roof or heating system and varies by geographic location, size, and age of home.
Utility Costs - This expense includes items such as electric, gas, water, and heating and air conditioning and varies by geographic location, size, season, and age of home. The type of construction (i.e. gas, electric) may also be a factor in your utility cost estimates.
Mortgage Insurance (if applicable) - This expense can vary by mortgage insurance company, lender, loan product, and loan-to-value percentage of the loan.
Other Costs - These expenses vary depending on the type of home and geographic location, these costs can include:
- Homeowner Association Fees
- Flood Insurance
- Other Required Property Insurance
- Condominium Assessment Fees