Whether you can afford the home youve always wanted will boil down to a simple factor: How much you make versus how much you owe.
Lenders are not eager to extend loans to borrowers who will become overloaded by taking on another debt, so there are some general guidelines to keep in mind when pursuing a home loan.
Determine your monthly gross income, which includes regular monies that can be documented. Remember that income that cant be documented cant be used to qualify for a loan. However, unearned sources, such as alimony and lottery payments, can be used as well as income-producing assets, such as stocks or real estate. If you have questions, ask a loan officer to help you with the rules.
After youve figured how much you make, calculate how much you owe. This is all monthly debt obligations such as credit cards, installment loans, personal debts or other monthly obligations such as alimony or child support. Debts that will be paid off in fewer than six months dont have to be considered.
Although each lender has his or her own formula, generally speaking, monthly housing expenses, including monthly payments for taxes and insurance, shouldnt be in excess of 28 percent of the gross monthly income. Additionally, the proposed monthly housing expense and total debt obligation cant exceed 36 percent of the gross monthly income. If it does, the loan may not be approved.
However, there are numerous types of loan programs available, and each one has different guidelines, so dont get discouraged by the process if your first choice doesnt work out and continue shopping around.
Your down payment can have tremendous impact on your ability to qualify for a loan. The greater percentage of down payment that you can make, the smaller the monthly payment you will pay. Likewise, closing costs, which can vary from 2 to 5 percent of the asking price of the home, also are part of the financial obligation that comes with purchasing a home.
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