This is pretty easy. Using your gross monthly income, current monthly credit obligations and prevailing interest rates, a loan officer can provide you with an approximate loan amount. Loan officers perform such pre-qualifications on a routine basis and are really good at it. And while it might seem a bit mystical at first, it’s nothing more than a step by step mathematical process. A quality and educated Colorado Springs realtor will help you research and cover all of the following when purchasing a house.
Determining Your Gross Monthly Income
Income can come from a variety of sources as long as there is at least a two year history of it. The most common form of income comes from a job where the borrower works full time. Part time income may also be counted as long as the lender can verify a two year history of consistent part time income. Contractors who get paid by the hour with regular overtime can expect to have the additional income counted. Those who work a part time job in the summer won’t likely see that income as eligible.
For those that are self-employed, lenders will review the two most recent federal income tax returns. Income from the business must be consistent from year to year while determining the business income will likely continue into the future. If the tax returns show any significant decline from one year to the next, it will be difficult to get approved. If there are any losses shown from a business, it will be deducted from the overall qualifying income. This happens when someone who works for an employer also has a side business.
Lenders use the gross monthly income from all borrowers on the loan application when determining how much you can borrow.
Calculating Your Credit Scores
Lenders will pull a tri-merge credit report that includes credit scores from all three credit repositories, Equifax, Experian and TransUnion. These scores will range from 300 to 850. Lenders will throw out the highest and lowest score, using the middle one as the qualifying credit score. If there is more than one borrower on the application, lenders will use the lowest middle score of all borrowers.
Most loans today require a minimum credit score of 620, with just a few exceptions. Once the income and credit are considered, it’s time to calculate the debt ratios.
Debt Ratio Calculations
Debt ratios are expressed as a percentage of gross monthly income and can be designated as a house payment ratio or a total debt to income ratio. Different loan programs have different ratio requirements and ratio guidelines can also be affected by the amount of down payment and credit scores.
The housing ratio is made up of the principal and interest payment, one-twelfth the annual property tax and insurance amounts and any monthly mortgage insurance payment. If there are any homeowner’s association dues those are counted as well.
An Example in Action
Okay, let’s look at a $250,000 loan amount. Property taxes on the Colorado Springs real estate are $1,200 and homeowners insurance is $1,200 annually. Broken down monthly, taxes and insurance (also known as escrow) payments add up to $200 per month. Financing $250,000 over 30 years at 4.25% , the principal and interest payment is $1,229. Adding up all three (property taxes, insurance, principle and interest) equals a payment of $1,429.
Gross monthly income is $5,000, so dividing $1,429 by $5,000 = .29, or 29%. Lenders like to see a housing ratio at or below 36 but again that can vary a bit. Now add a $500 car payment as the only other monthly debt. $1,429 + $500 = $1,929. For a total debt ratio, the answer is $1,929 divided by $5,000 = .39, or 39%. Lenders today like to approve loans where the total debt ratio is at or below 45% but it this can vary depending on the loan program.
That might seem a lot at first glance but really it’s all about getting a credit score and comparing monthly debt with income. As long as your debt ratios are in line, credit is good and you have enough verified funds in an account you own to use as a down payment (if required), you’re good to go.
Now that you have an idea of how much of a payment you can qualify for, take advantage of our easy-to-use Mortgage Calculator to determine what price range homes to start looking at. Still have questions or prefer to have a qualified professional do the numbers for you? Contact us here, or call us at (719) 574-2227.
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