How can someone determine how much of a mortgage they might qualify for? Using some basic math skills it can be quite easy for someone to determine how much of a mortgage they can qualify for. These are some simple methods anyone can use to see how much of a mortgage they can afford before seeking out a mortgage company for financing.
The most basic formula for figuring out how much of a mortgage one may qualify for is the two and one half times income formula. This will help someone figure out the amount they can qualify for before any other factors are figured in and can be used as a basis for determining the qualifying mortgage amount. For an example, let's assume that someone has a gross income of $30,000 per year. 30,000 multiplied by 2.5 equals 75,000. This means based on this income amount a person will qualify for a $75,000 mortgage.
Your Income To Debt Ratio
Another factor that will play into how much of a mortgage someone can qualify for is their other monthly expenses. This is where what is called a "debt ratio" comes in. This has to do with someone's monthly expenses and the amount of income they have left over after these obligations are taken out. Prior to the mortgage meltdown, many mortgage lenders would consider a debt ratio of up to 70 percent or more, depending on other off-setting borrower strengths. Normally, however, the debt ratio needs to be about 40 to 45 percent for a mortgage to be approved. This can be broken down so that it is easily understood.
Let's say someone's monthly gross income is $3500 per month. This comes out to $42,000 per year and would qualify them for a $105,000 mortgage. Let's say they only need to borrow $100,000 and their estimated monthly payment would be $400. They have a car payment of $400 per month, credit card payments of $300 per month, and living expenses of $475 per month. With the new mortgage payment added in, they would have a total of $1575 in expenses. $1575 divided by $3500 is approximately a 45 percent debt ratio, meaning they will have no problem qualifying for this mortgage. However, now let's say someone with the same income has a car payment of $500 per month, credit cards of $500 per month, a personal loan for $250 per month, and monthly living expenses of $500 per month. Adding in the new mortgage payment would mean total monthly expenses of $2150, giving them a 61 percent debt ratio. This could mean that the lender would require the borrower to put more money down on the house, meaning less of a mortgage amount, and thus a lower monthly payment.
While credit may also be a factor in a mortgage company's decision, the income and expenses of an applicant, or applicants, will be the main focus of how much of a mortgage one will qualify for. Knowing how important these factors are and being able to have this knowledge prior to applying for a mortgage should provide the insight needed to better prepare someone in knowing how much of a mortgage they can get.
