How to Know How Much Home to Buy
Knowing how much home to buy is just as important to you as it will be to the lender.(DEBT)
Lenders have a comfort range of how much your house payments can be, based upon current interest rates and the amount of money you want to borrow (DEBT).
On the other hand, what is important to you simply might be what you feel comfortable paying every month.
HOW MUCH CAN I BORROW?
That depends on a variety of factors, but the most common answer is that your debt ratios are in line with lending guidelines.
But it may also be more than that.
It may just be the amount that you feel comfortable with.
Often when I’ve prequalified clients, typically first-time home buyers, they’re surprised at how much money a lender will lend to them.
“Oh gosh, no. I don’t want that much money!
Still others are disappointed that they can’t borrow more than the lender feels comfortable with, using the very same loan parameters.
What’s good for one borrower may not be good for another.
Different mortgage programs can have different lending guidelines, but for the most part these programs decide how much you can borrow based upon debt ratios.
It used to be that debt ratios were relatively strict.
If a ratio were above 41, for example, the buyer would either have to borrow less or find a cheaper house
WHAT ARE DEBT RATIOS?
This is the most significant concept in lending today. And maybe the most misunderstood as well.
Consumers are told time and time again about their “debt ratios.”
They hear mystical numbers tossed around, like 28 percent and 41 percent “back end”
(note that every lender has different debt ratios).
Debt ratios are a percentage of debt compared to income.
If you have a debt ratio of 10, then your bills represent 10 percent of your gross monthly income.
Over the years, lenders have relied on historical data to set guidelines that tell them which particular ratio allows the lender to make the biggest loan to someone while at the same time making it a “safe” loan for the consumer, meaning the lender won’t have to foreclose on the house due to making it a “safe” loan for the consumer, meaning the lender won’t have to foreclose on the house due to nonpayment.
HOW DO I CALCULATE MY DEBT RATIOS?
Obligation proportions are two numbers communicated as a level of your gross month to month salary.
The principal obligation proportion is called your lodging proportion since it just uses your home installment
(which incorporates your month to month assessment and protection installment) for the proportion.
This ratio is often also called your “front end.”
The subsequent proportion is your lodging proportion in addition to some other obligation recorded on your credit report, isolated by your gross month to month salary.
This is sometimes called the “back end” ratio or total debt ratio.
Common front and back ratios on conventional loans with 5 percent down are 28 percent and 36 percent, respectively.
DEBT RATIOS AFFECT MY BORROW?
There are debt ratio guidelines for almost every loan program, but they’re only guidelines, not hard-and-fast rules.
Different loan programs have different ratio rules.
Even the same loan program can have different ratios depending on the amount of the down payment.
In fact, throw those “rules” out the window, because that’s not how it’s done any longer.
Okay, maybe some rookie loan officers or the otherwise uninformed adhere strictly to the guidelines, but it is not the practice of the industry as a whole.
Knowing how much home to buy can be more of a comfort factor than anything else.