How lenders determine your home buying budget
Buying a home used to be an easy process that everyone did once they reached the age of marriage, however, the economy and housing market today is very different than it was in the fifties so it is important to take a step back and carefully analyze your personal finances before you attempt to secure a mortgage or speak with a Los Angeles real estate agent. This is the same process that any bank would complete and will allow you to get a clear picture of how much a lender is going to offer you when you apply for a loan. Generally a lender will look at how much you owe in debt versus your yearly salary in order to determine the amount you will receive.
How much do you make?
If you are curious to see how much money you will have to work with when buying a home, then you can attempt the calculation yourself. First you need to take a look at your total gross monthly income. This includes any income that you can document that you receive on a regular basis. Any income that cannot be documented on a tax return cannot be counted as income. However, lottery payoffs, alimony, and other unearned sources of income can be used. In addition, assets that produce income such as stocks or real estate can be considered in the final calculation.
How much do you owe?
Once you know your income you need to add up how much debt I under your name. Debt calculations need to include all monthly obligations such as car loans, credit cards, personal debts, installment loans, child support, or similar monthly payments. When calculating things such as credit card or car loan debt use the minimum payments requested. When calculating installment debt, use the monthly payment that you owe now.
Any debt that is estimated to be paid off in six months does not need to be considered.
The point of these numbers is to make sure that you do not end up with a home loan that is going to be too much for you to handle in addition to your current debt. Most lenders do not want your monthly house mortgage payment to be more than 28% of you gross monthly income. In addition, your monthly debt payments and mortgage should not be more than 36% of your monthly income. Any mortgages that will take you higher than these numbers will be denied. You may be able to alter these figures slightly based on your down payment.
These two points and how they balance each other out, are the most important thing that the lender will look at. If you have additional questions on this topic, contact us!
Elizabeth Marquart is Southern California’s real estate expert and home improvement project manager of choice. She always provides reliable and diligent real estate representation-all with the highest degree of integrity. Visit www.ElizabethSells.com or contact her for any real estate and home improvement questions by calling (310)246-0888 or at AskElizabeth@ElizabethMarquart.com.