Q: How do I know how much of a mortgage I can afford?
The primary indicators of the loan amount someone can afford are based primarily on 3 things;
1. Credit – Your credit score ( Fico score ), and to simplify the topic, the overall health of your credit-weather you have had a bankruptcy, foreclosure or short sale in recent years may have an impact as well. After a certain number of years, these credit issues may no longer be much of a factor or even show up any longer-the best way to determine your credit is to have a licensed mortgage broker order a tri merge credit report ( the gold standard in credit reports) you may also obtain a free credit report once a year at www.annualcreditreport.com. This report may not show scores, but the overall reporting items within the report.
2. Collateral – That is to say, how much money your putting down on your purchase. Note
3. Ability to repay – Lenders look at a borrowers income vs expense, also considered the borrowers “Debt to Income Ratio”, or how much money/income they have coming in, compared to how much they have to spend each month. Banks aren’t looking at all of a borrowers expenses in considering their debt-primarily banks are looking at revolving credit expense such as credit cards, car payments, student loans, and then they add this to the new proposed house payment & come up with a ratio. For example: if a borrower makes $8,000 a month in income, and has credit expense of $2,000 per month, and the home they are considering a mortgage that will run them $2,000 a month, then they would have a 50% debt to income ration. Most lenders want to keep that debt to income ratio (or the amount of your income they will allow you to spend on the new home payment and additional revolving credit debt) to 45% of a borrowers gross income. ( with self employed persons, lenders work off of Net income-yes it does seem unfair, but those are the joys of self employment)
I would suggest using an online home affordability calculator, but in writing this I just reviewed the top 3 online and they were very incorrect. Contact a mortgage broker to get an accurate idea- I can help you calculate your maximum mortgage amount in under 5 minutes.
Q: What is the minimum credit score I need to obtain a mortgage?
Most conventional lenders require a minimum credit score of 620, some lenders, particularly with government backed loans such as Fha, go as low as a 580 credit score, and some lenders with specialized programs will go even lower.
Credit score impacts the interest rate, and in turn how much the monthly payment will be, and how much money a borrower may need to put down for their purchase.
Q: What is the difference between a pre qualification & a pre approval?
Q: How much money do I need to put down to buy a home?
Q: What loan documents do I need to obtain a home loan?