Mortgage Debt to Income Qualification Calculator
Are you a prospective homebuyer already weighed down by a number of debts? Don’t despair. This calculator will help you determine the cost of a home you could afford given your current financial obligations. First enter your gross annual income and the amount of money you spend monthly on debt payments. Information regarding your debt-to-income ration (DTI) will populate automatically in the fields below. Then provide a down payment you could afford, followed by an expected interest rate, private mortgage insurance percentage, and monthly insurance costs. Finish up by choosing your loan term: 10, 15, 20 & 30 years terms are the most common choices with most buyers preferring the 30 year option. Click on “Calculate” and you’ll receive a detailed breakdown of the costs associated with a home that you could conceivably qualify for in your current financial situation.
Do you need to know the current market conditions in your local area? We publish current mortgage rates to help you make accurate calculations and connect with local lenders.
Today's Mortgage Rates
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Qualifying for a Mortgage: 15 Must-Know Facts
When it comes to qualifying for a mortgage, there are many essential topics you should understand, as purchasing a home can be a complicated and confusing process. By learning about these subjects, you put yourself in an advantageous state and enable yourself to handle all the twists and turns that arise from buying a home. Here are some must-know facts for any future or first time home buyer.
1. Making a Down Payment
Because lenders need to limit risk and collect some sort of monetary backing, almost all require a certain portion of the home's sale price as a down payment. After the housing collapse of 2007, this down payment rate soared as high as 20 percent throughout the nation. This rate has lowered to a much more reasonable amount, typically 5, 10, or 15 percent, though this amount is highly dependent on your credit risk.
The general rule is that the less of a credit risk you are, the less banks and lenders ask as an initial down payment. However, lenders tend to allow higher credit risks if they receive a higher down payment. If you have great credit, but not as much income, you might be required to buy private mortgage insurance (PMI) to protect the lender against potential default of the loan. Also, remember to shop around, as lenders often have deals that allow you to put zero money down.
2. Keeping a High Credit Score
Your credit score is one of the many factors lenders take into account when deciding whether to issue a mortgage. If you are unaware of the makeup of your credit score, here it is:
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- Types of credit used (10 percent)
- New credit (10 percent)
These are the factors typically used by FICO in determining your credit score. Remember that other credit providers, such as Experian and Equifax, also include the amount of times your credit is "run," meaning that it's important not to have your credit pulled on a frequent basis, as it lessens your overall score.
Keeping a high credit score isn't always easy, especially if you have poor payment history. However, it is possible to get your credit score moving in the right direction. The first thing to do if you have poor credit is to pay any amounts in collections. After that, try to consolidate your debt into one or two credit cards and not 10 credit cards, each with a low balance. Finally, make payments on time and keep all balances at a minimum.
3. Considering All Costs (Hidden or Not)
While it's easy to believe that if a home costs $500,000, you'll get a mortgage for that specific amount, this couldn't be further from the truth. Additional costs are a reality in any home purchase.
Before quoting you an amount for the mortgage, lenders send out inspectors to survey the land and inspect the property to make sure the home is up to code. The cost of this inspection varies by location, but typically is no more than $1,000. Even if your lender doesn't require it, having an inspection done helps you avoid houses that look nice, but are a structural catastrophe.
Note that you also pay some sort of property tax, usually at closing, and then you pay the taxes on a yearly basis. The amount varies depending on state and local tax rates, and many lenders pay these for you through an escrow account, especially if your down payment was below 15 or 20 percent.
Other small fees you'll need to be aware of include loan origination fees, appraisal, deed fees, credit report fees, and insurance. If you're familiar with all of these, there won't be any surprises when you go to the closing on your new house. When in doubt, put in all your costs to calculate your monthly payment.
4. Steady Employment
Employment history and current employment are vital factors when it comes to qualifying for a loan. Lenders want to see that you're employed with a job that you've worked at for a minimum of two years (lenders will ask for your most recent pay stubs, tax returns, and W-2s). However, don't fret if you haven't had your current job for that long, as income from employment also factors into the application.
A varied job history, or having several different jobs within a short period of time, hurts your application process because lenders believe you can't hold a steady job. When in doubt, explain your case to the mortgage lender, as their trust in you is a vital aspect of whether you'll get approved.
5. How Much You Can Spend
Buying the right house is a large determinant in whether you qualify for a mortgage. As a general guideline to follow, your monthly mortgage payment should be one-quarter to one-third of your gross monthly income. Also, factor in other outstanding debt payments (i.e. car notes, credit cards, student loans) to add to this number. Additionally, you'll need to calculate amounts you are saving for, such as college education or retirement. By figuring this, you know how much to spend on a house without living outside your means.
6. Debt to Income Ratio
An often overlooked number in determining your chances for a mortgage is the debt-to-income ratio. This number plays a heavy role in figuring how much you can spend, as well. The debt-to-income ratio gives lenders a general idea or insight into your reliability in paying back the mortgage.
Lenders use two debt to income ratios: a front-end and a back-end ratio. The front-end ratio establishes how much of your monthly income is going towards the mortgage, while the back-end ratio calculates how much of your income goes to all debt obligations. If this ratio is too high, lenders are hesitant to issue a mortgage. The ideal amounts are 28 percent for the front-end ratio, and 36 percent for the back-end ratio. This is merely a loose rubric for the ratio, and with the proper amount of income, you still can overcome a higher ratio than 36 percent.
7. Getting More Credit
Because lenders look for a responsible borrower, obtaining more credit is one way that you make your credit report more attractive. It seems odd that obtaining more debt is conducive to getting a mortgage, but the reality is that being able to pay off other obligations shows responsibility on your part. To get more credit without spending too much, try opening a new low-interest credit card, or borrowing against your savings or retirement account.
A 401(K) loan is an easy way to build credit because it is a secured loan. Just make sure not to spend all the proceeds; rather, take the money and invest it or hold on to it to make your monthly payments. This is important, as lenders won't lend to people with a limited credit history, even if all the credit is in good standing.
8. Considering FHA Loans
If you don't have a ton of money for an initial down payment or perhaps less than ideal credit, consider a FHA loan, which is a mortgage backed by the United States Federal Housing Administration. Because the government backs the loan with full faith, lenders tend to trim back their requirements for down payments and an extensive credit history, and they'll usually offer a lower interest rate. The minimum down payment for these loans is 3.5 percent, and the interest rate often falls under 3 percent. Remember that you need extra insurance on the house before the FHA loan is approved.
9. Co-Signing for a Mortgage
If you end up not qualifying for any type of mortgage, consider obtaining a co-signer. A co-signer is an individual, usually a family member or spouse, who promises to make payments in the event that the borrower can't. Finding the right co-signer, however, is the problem, as a lapse in payments puts their financial well-being and credit score at risk. If you're married, than your spouse is usually the co-signer. If not, than parents are the ideal partners. Just make sure that you have total trust in one another before signing on the dotted line.
10. Having Liquidity
Before qualifying for a mortgage, and even after you obtain one, it's important to maintain a certain level of liquidity in your finances. Liquidity refers to the amount of personal assets that are easily convertible to cash. Cash, obviously, is totally liquid, and the ideal form of liquidity. Stocks, bonds, mutual funds, and commodities are also highly liquid assets.
Illiquid assets, or those you should avoid if possible, are cars, antiques, collections of memorabilia, or private company stock. These all take time to sell, and if you are in a crunch for money, they are not the types of assets you want.
11. Shopping Around
The ideal way to qualify for a mortgage and get the best rate is to shop around, much like you would with anything from cars to groceries. In this way, you can find a rate that satisfies your needs. Also, because the housing market stagnates from time to time, lenders periodically offer special rates or offers. Some standard offers include free appraisal, reimbursed closing costs, or cash back on the loan.
12. Obtaining Pre-Approval
Pre-approval for a mortgage is often the best way to go about obtaining a mortgage. The advantage to pre-approval is that you get to meet with a lender and discuss the various needs and wants of each party. They let you know how much they will allow you to spend, and thus, you narrow your scope on which house you want to buy. While this pre-approval is seldom considered by the final underwriter, it gives you some perspective into improving your financial position, especially if you get denied for pre-approval.
13. Appraising the Home
While most lenders require an appraisal before deciding how much they are willing to loan you, it's usually in your best interest to do it up-front. The appraiser looks at the various factors that determine the value of the home, such as neighborhood, size, land, and amenities, and then calculates a dollar figure. This helps make sure that you don't overspend, and that you only take out a mortgage for the proper amount. Remember that even if the house appears totally legitimate, you still need to factor in small expenses, such as new paint, gutters, doors, windows, and other aesthetic touches.
14. Private Mortgage Insurance
If you are unable to put up 20 percent or more of the price of the home as a down payment, you'll need to get private mortgage insurance. This insurance makes payments for you in case you default. The amount paid a month for the insurance is typically an annual premium between 0.5 and 1 percent, and this premium is included in your monthly mortgage payment. Make sure that you keep a watchful eye on your home's equity, as once you have 20 percent equity, you'll no longer need the insurance.
15. Just Relax
Although buying a home is indeed a pricey expenditure and a life-changing decision, remember to breathe and keep calm. The less you stress about the situation, the more enjoyable and easy the entire process becomes. Obsessing over things you don't have control over leads to unnecessary stress at a time when you should be excited. Remember that most everyone around you in the mortgage business is there to help you. It's in everyone's best interests to make the home buying experience as easy and as comfortable as possible.
Qualifying for a mortgage is a topic that has negative connotations, although unwarranted. By reading through this information, however, you are an informed, wise investor who understands the whole process. You'll know which house to pick, where to look for your loan, and how to ease your way through the process. The only problem you'll have after purchasing your new home is deciding where to put the hot tub.
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