How much you can afford may not be the same as how much you should afford. As a lender and Realtor, I work with lenders to determine this regularly. Standard guidelines indicate a debt ratio of up to 45% (in some cases they will approve up to 50%). This would be your gross income multiplied by 45%, less any other credit debt, car payments, credit cards etc.
If you earn $5000 per month before taxes, 45% of this is $2250. If you owe $350 for a car payment and $50 for credit cards, your available Principle, interest tax and insurance payment would be $1850.
From here you need to figure out how much down payment your willing/able to put up and still have adequate reserves, what rate you qualify for and from there what that payment (less taxes and insurance), plus down payment equals in a house.
Of course there are other issues too. Home owners associations, special assessments, loan programs just to name a few.
While becoming educated on the process is critically important, you'll still need to rely on a professional lender to fine tune all this and give you the most accurate number.
Checking with your bank, a credit union or a mortgage broker/banker should be done for the specific details of your situation we can't be aware of in a forum like this.
The other thing to remember, just because the bank says you are qualified to buy a $1,000,000 home doesn't mean you should buy that much. Many financial guru's like Dave Ramsey would never suggest you push your limits as high as 45%. Ultimately that decision is up to you and youâ€™ll have to live with it. Best of success in home shopping.
The thing that Karl needs to decide, given his personal circumstances, is what his monthly payment can be. From there, he can extrapolate how much he can borrow, and adding his down payment to that . . .
Just because you are approved for XYZ doesn't mean you will be comfortable paying that much each month.
You can access 20 calculators using the following link to help you be as accurate as you like. It will depend on the amount of data you provide.
Just contact me if you need assistance on the required data by the calculators or If you need a list of trusted lending professionals for consultation.
Here is a link to help you with financing information:
Broker Associate - DRE 1844627
Paragon Real Estate Group
Take the number they give you as a maximum possible regardless but not necessarily a realistic maximum for you.
Now look at your numbers. as a simple example.
You make $1,000 a month take home income.
$100 on student loans.
$200 on a car payment,gas, and insurance.
$250 on food.
$50 for clothes and shoes.
$100 for electricity.
and $250 for rent.
You spend this every month and nothing more except for an emergency.
That takes all of your income every month except for $50. Add this to your rent ($250) and that is the most you can afford.
You know that you can only afford $300 per month for a house, taxes, house insurance, heat, repairs, trash removal, water, and so on.
Even though the bank may say you could borrow $450 it is beyond what you can really afford. You also realize you must save some money for expenses that will come up like heat so you take that from your monthly payment.
"The above link is the best place to determine how much you can afford with the highest degree of accuracy."
That is terrible advise. A calculator does not know what the current interest rates are or what the individual's interest rate would be, so it cannot possibly qualify anyone with accuracy. Someone that is eligible for a 4.25% interest rate on a 400K loan can have a lower income than someone that can only qualify for a 5.5% rate. There is over a $300 difference in payments. A calculator does not know what programs someone would qualify for or the different guidelines required, it does not know that FHA loans add 2.25% to the financing, it cannot distinguish the difference in MI for FHA versus conventional, it cannot do Fannie Mae LLPAs that either increase or reduce cost. I find it shocking that a licensed agent would refer a client to a calculator rather than fellow licensed colleague for professional advice.
The above link is the best place to determine how much you can afford with the highest degree of accuracy.
A couple of years ago I would be able to give you ratios. With new lending rules changing every day now it is best to seek the advice of a Mortgage Broker. You will need one anyway when you choose a home. Best to find one now.
NO ONE CAN render an opinion unless you tender the required documents feed into formulas and "spits out" what you can afford.
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
No choice here other than talking to a lender. It does not matter what you think you can afford... what matters is what they will lend you. It is the first step anyway. In this market, without a pre-approval from a lender.. .they will not even look at your offer. After the lender lets you know, then you decide how much of that are you want to vary from that amount.
There are other benefits of credit unions to consider as well such as reduced closing costs and longer rate lock periods. However, if professional advice is desired one might fall into the situation I touch on in #3 of my post below. If you want to make sure the person you are working with knows the basics, ask some questions regarding some of the topics found here: http://docs.Steven-Anthony.com/RateShopping-DoItRight.pdf
When the economy tanked, you probably watched bank investments get cut in half or more... though I have money in both... my state investments didnt move... this should tell you that the credit unions are going to watch it more, make sure their investments are educated. Oh and I havent seen them ask for a bailout either.
1) Try getting an Automated Underwriting System "Accept" for a Pre-Approval from a big bank. A true Pre-Approval letter with an AUS "Accept" from a Broker is an awesome Buyer advantage.
2) Try moving your big bank "Pre-Approval" to another lender when you see a better rate elsewhere. A broker has access to multiple lending sources to find the best rate when it comes to locking.
3) Talking about rate locks, try getting professional advice on when to lock your rate from a big bank. Professional Brokers I know have direct access to Mortgage Backed Securities trading in order to monitor whether trending indicates a rate lock or "float" strategy is more prudent.
4) Bank employees do not need a single DRE class to help a consumer with financing what is typically the largest financial purchase in one's life. Additionally, they are also exempt from the new educational and legal requirements of Nationwide Mortgage Licensing System.
I beg to differ. Getting a pre-approval from a major bank carries no more weight than from a broker that has access to major banks and more. A pre-approval from BofA is just that ... from BofA and if something changes, there is no where else to go. A broker has access to multiple lenders for every scenario and as you know in the buying proces, things change. A broker's approval is no less valid than anyone another's and agents that perpetuate this myth should stop doing so; it's a disservice to their clients and 100% untrue. Also, the average LO at your "major bank" is not even licensed, nor do they have to be and certainly not under the same scrutiny to dot the "i's" and cross the "t's". Some may disagree with my opinion, but it is just that; my opinion and I've seen enough "major bank's" pre-approved clients come to me to get a quick funding after their deal blows up to back it up.
Tripoint Mortgage Group, Inc.
Matthew, you should educate your client's before sending them on a wild goose chase; you should know that they will not get any meaningful pre-approval in the stage this borrower is in. Without a property selected, any pre-approval is not worth the paper it's written on, so this is a pointless step that will only mislead the borrower. Until a property is selected and an offer is ready to be made, pre-approvals don't mean anything since there is no way of knowing what the property will be, or if it will even qualify. Most brokers won't even take an application without a property address due to RESPA issues. All this borrower needs at this juncture is a good evaluation of their income, assets and liabilities coupled with a verification of seasoned funds to close. With that in hand, they can begin shopping and any REALTOR that is expecting more than that, at this stage, is missing the boat. If anyone is out there pre-approving borrowers without an address, I'd be very cautious of that.
This should give you the most accurate picture. Also there is no gaurantee even after this that there will be no other hurdles to cross, lenders as you know are fickle these days and the Underwriter can ask for many things later on.
also a good mortgage broker can advise you on some things to improve your credit / maximize your buying power if that is what you need.
If you need a recomendation try Ed Diaz, here is his LinkedIn page url http://www.linkedin.com/pub/ed-diaz/15/ab1/235
Absolutely, the best way to determine your *accurate* purchasing power is to get pre-approved for mortgage financing by a local, experienced mortgage banker or broker. See below for a link to recommended lenders.
Let me know if we can help.
A Pre-Approval from a Mortgage Broker/Banker is most definitely the best method of understanding what you can afford with high accuracy. A CPA will not be knowledgeable regarding the seemingly constant lender guideline changes that occur monthly.
The terms â€œPre-Qualificationâ€ and â€œPre-Approvalâ€ are used interchangeably in the RE Industry to mean the same thing â€“ they are not. Even if it says "Pre-Approval" at the top of your "Pre-Approval" letter it may not be. If you are looking for accuracy void of surprises once you enter into contract you want to be Pre-Approved first. For the differences see: http://www.Steven-Anthony.com/default.aspx?pp=39377
There is also an informative discussion at the link below regarding the three primary conduits that you can use for your financing, and how your loan rate is determined.
Talk with a reputable lender. They will tell you and it doesn't cost anything. But keep in mind that until they have reviewed all your documentation any "approval" you get you will in reality be meaningless. We work with several lenders who are reputable, take care of business the right way, and offer different programs. If you'd like some referrals send me an email.
Lance King/Owner-Managing Broker
Gregorio has the best answer because it is communicating with a real person and it is free. Your CPA would be good but would not have knowledge of all the different loans out there. All realtors have access to excellent, well-qualified mortgage brokers and can give you their names and numbers. You can also find some excellent ones on my website under Resources/Mortgage Brokers/Bankers. You need to be very honest with them.
I would also call your banker and see if they can give you some sort of discount which they can do -- especially if you are a first time buyer. Then you must decide your comfort level because you might be qualified to spend more than you would want to do. No one wants you to be nervous about " that" much of a montly commitment. Once you have decided how much you want or can spend, contact a realtor who can assist you with finding the right home for you.
I agree that the best way is to get pre-approval from a mortgage broker or a bank. As a Realtor from SF I can give some referrals.
Give me a call
Then based on where you plan to buy, he can also get an estimate of closing costs and proration of taxes.
Even better....you can also recruit the assistance of someone from the title company.
Fidelity National Title Company also has a software they call Fidelity Agent that realtors use.....and we can put together estimates using this software and can provide scenarios at different price levels, etc.
But your most accurate estimate occurs when you're in escrow and the title company has al the information they need to provide estimates that include provisions for credits, and who pays for what (transfer taxes, HOA fees, for example) in case these were negotiated with the seller.