How Much of a Loan You Can Get Depends on Your Income and Debt
If you know your credit rating score, and it is at least 620, how much of a loan you can qualify for is directly related to how much money you make, how much you put as a down payment and how much debt you have.
Many people think that a higher credit score will mean they can qualify for more of a loan, when in fact all a credit score does is determine how much interest you are going to pay on that loan.
A higher credit score means you will get a lower interest rate.
What actually determines the amount of a loan you can qualify for is your debt to income ratio.
Debt to Income Ratios
Lenders want to make sure that you can afford to make the monthly payment if you get a mortgage. One way they have come up with to do so is to make sure your mortgage payment stays within a certain percentage of your monthly income, using a debt to income ratio.
A debt to income ratio determines how much recurring (monthly) payments you can make compared to your income.
If you already have a lot of debt, such as credit cards and car payments, then the amount of the loan you can get will be less.
Less debt means you can qualify for more of a mortgage and vice versa.
A debt to income ratio is calculated two ways, the first being the front end ratio and the second the back end ratio, using standards established for the type of loan you are applying for.
- FHA ratios are 31/43
- Conventional ratios are 28/36
- VA ratios are 41 only
How Ratios Are Calculated
A lender will take your gross monthly income and multiply it by the first ratio to get your front end ratio. This will tell you roughly what monthly payment you can qualify for.
To find the front end ratio for a FHA loan (the most common type for first time home buyers), take your gross monthly income and multiply it by .31.
For example, if you make $66,000 per year, take $5500 a month times .31 to get $1705. You can roughly qualify for a loan that has a monthly payment of $1705 per month.
To find the back end ratio, take $5500 and multiply it by .43 (for FHA), and you get $2365 per month.
Take all your monthly debt, such as credit cards, student loans, car payments, that you make monthly payments on and add that to the $1705.
If your new total debt payment is over $2365 per month, you have to reduce the mortgage payment amount until your total monthly payments are equal or lower that $2365.
As you can see, the front end ratio is used as a ball park figure, but the back end ratio really determines the monthly payment you can qualify for.
How Much Loan You Can Qualify For
Don’t waste your time using those on line mortgage calculators, go find a mortgage broker and have them run your numbers.
The only on-line calculators we have found have you put the price of the house in, along with the number of payments and interest rate, and tell you how much the monthly payment will be.
You don’t care about that, what you are looking for is what price range of homes you should be looking at. And there is no simple or easy way to answer that question.
A good mortgage broker will be able to give you a good idea of what you are qualified for over the phone.
Find a Mortgage Broker
An easy way to find a good mortgage broker is to contact a real estate agent and see who they recommend, as agents know who really knows what they are doing.
To find a Realtor simply go to Zip Realty and email any agent that works in the areas you are interested in, and ask them for the name and number of a mortgage broker they like to work with.
This is a simple way for you to to pre-screen mortgage brokers – agents try to only work with lenders they know can preform.
