What are the basic calculations to estimate mortgage eligibility? Is 2.5 times income still used to estimate affordability of home?

Asked by Weziana, Frisco, TX Sat Dec 19, 2009

conv, fixed rate,

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T.E. & Naima…, Agent, Dallas, TX
Sat Dec 19, 2009
Generally, monthly payments (estimating a 100% LTV, which is rare now) run about 0.8% of the sales price, but can be more or less, depending on the tax and insurance rates of the exact community.

For 0.8% to work out to 30% maximum of your gross monthly income, you would divide and find 37.5 times your monthly income (or 3-1/8 times your gross annual income). Bear in mind that this is a rule of thumb, not an industry regulation.

The 0.8% comes from $5.37 per $1,000 of mortgage amount at 5% for full PITI [0.537%], plus 2.5% per year for real estate taxes (some places around Frisco have 3.1%, some 2.3%) [0.208%], plus for insurance a range of 0.5% to 1% per year for full coverage [0.042 to 0.084%], for a total of 0.787 to 0.879%, depending on the tax districts and selected insurance coverage. The interest rate of 5% is typical but can be higher or lower. Some big name mortgage brokers claim it is much higher -- just do a little shopping.

The 30% of gross income is also subject to what your total debt payments are per month. Some guidelines allow up to 45% of income for all debt payments and 33% of that for housing, but some guidelines for other loan types allow up to 41% total for housing or all debts. There is no single target. So, 30% may be a little conservative but may be too high if you have a lot of other debts to pay each month. Other payments include credit cards, car loans, child support, installment loans, etc. You don't have to include current mortgage unless you're keeping the property.

Of course if you put more money down and get a loan for only 80% of the sales price, your payments will change. The PI part will be 20% lower but the TI part won't budge, because they're based on price, not loan.

Aren't you glad you asked? At the moment use 3x, unless you know you can't afford it due to other payments.
Web Reference:  http://www.Mortgages-TX.com
2 votes
Tommy Burris, Mortgage Broker Or Lender, Baton Rouge, LA
Sat Dec 19, 2009
.45% * gross monthly
subtract all recurring monthly bills(auto loan, credit cards, ect)
the remainder is available for mortgage payment.

currently your mortgage payment will be a bit less than 1% of the purchase price. That .8% T.E. quoted is likely pretty accurate
1 vote
Kari King, Agent, McKinney, TX
Sat Dec 19, 2009
Hi, the general rule of thumb used today for conventional is the 28/36 ratio. The total monthly payment (PITI) should be no higher than 28% of gross monthly income and the total outstanding debt (including PITI house payment) should be no higher than 36% of gross monthly income. We can help you further with "qualifying" you meaning we can check to see if you fall within these ranges as well as help you determine a more accurate cost of owning the home (PITI, HOA, etc.). However, a lender will be the best source to determine exactly what you qualify for and I recommend checking with several during the initial steps of homebuying.
1 vote
Al Akerman, Mortgage Broker Or Lender, Lakewood, NJ
Sat Dec 19, 2009
Weziana, I am not telling you what you can afford obviously.

Until recently your back end ratio (principal, interest, taxes, ins. and any other monthly payments that show up on your credit report) was able to be as high as 65 (meaning 65% of your income was allowed to go towards those payments) depending on your credit, how much you are putting down and a few other factors.

The max now with Freddie Mac is 55 and the max with Fannie Mae is 45-50.

Not all banks do Freddie Mac so you would have to ask your lender what the max is.

As I mentioned, it also depends on varios other factors. If you run your numbers at 41 and your credit is decent you should be fine.

I hope this was helpful. Good luck.
0 votes
Keith Sorem, Agent, Glendale, CA
Sat Dec 19, 2009
The best answer is that in order to know the amount for which you qualify you need to talk with a mortgage professional. The correct answer is "it depends" and you should know that overall mortgage qualification is MORE difficult than before.

If you really want to be a home buyer, you should find out now the amount for which you qualify. In some cases a sharp mortgage professional can not only determine your current level of qualification, but also discuss options and what steps you might be able to take to improve your level of qualification.
0 votes
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