Learning How Much Mortgage You Can Qualify For
It’s one of the most frequently asked questions when someone begins their search for a home. “How Much Mortgage Can I Qualify For?” is one of the most important questions someone can ask, because it will help determine what type of home they will look for, what area(s) they may look in, and will allow a Realtor to really narrow down a home search and focus on what’s within a home buyer’s reach.
Believe it or not, though, “How Much Mortgage Can I Qualify For?” is a secondary question compared with “How much Mortgage Should I Qualify For?”. The real starting point is figuring out a monthly payment that makes sense. Mortgage loan qualifying is largely based on a term called “Debt to income ratio”, or DTI. DTI is a percentage of your income that is devoted to debt, and is always calculated as a percentage.
For some people, a high DTI is not a big deal, but for others, it could be disastrous. Many loan programs (not all) don’t factor in a borrower’s disposable income – the actual dollar amount left over at the end of each month after all the bills are paid, utilities are paid to keep the lights on, and groceries are purchased. So for a borrower with lower income, a high DTI could be disastrous as it could mean very limited disposable income to cover life’s unexpected events. That same DTI may be no big deal for someone with lots of disposable income on hand.
So how much mortgage can you qualify for? Your loan officer will guide you through different loan options available to you, and your maximum qualifying loan will depend on a few things – your income, credit, and amount of money to put down as a down payment being the big ones. Typically, having better credit will allow a higher DTI, and putting more money down, therefore reducing your loan amount, will also help lower the DTI.
The type of home you buy will also determine how much mortgage you can qualify for. For example, a condominium property may seem affordable, but could come along with high HOA dues or property assessments that may make the property unaffordable, even though the purchase price could be lower than a single family home. Likewise, a single family home could have additional taxes attached to is, such as Mello Roos taxes in California or 3rd party tax assessments and additions that could make the cost of ownership much higher than indicated by a price tag. This is where having a team helping you along the way makes a huge difference in the home buying process. A good loan officer can help you price out different purchasing scenarios, and knowing the max you can qualify for AND the max monthly payment you want to qualify for, a good Realtor will guide you to properties that you’ll like AND be able to afford, all things considered.
Another consideration that comes along with property types lies in unique properties such as condotels, non-warrantable condos, or agricultural and mixed use properties. The price tags on such properties may make them appealing, but additional down payment or asset reserve requirements could put this type of property out of reach. This, again, is where working with a great home buying team can make a ton of difference in your experience.
Planning for the future
Nobody has a crystal ball, but thinking about the future can help you determine how much mortgage you qualify for, too. Are you working in a field with steady income raises? Are you relocating on a job offer in a situation where a co-borrower will be moving too and finding a job once settled in?
Perhaps you’re interested in buying a multi-unit home where you’ll have both job income and rental income to help cover mortgage payments and add additional cash flow? Perhaps you have an auto loan with a high monthly payment that’s about to go away, or your student loans are about to be paid off?
All of these scenarios and more could affect the amount of mortgage you qualify for. Sometimes, it makes sense to temporarily carry a high DTI because you’ll soon see your cash flow and disposable income increase. It’s important to not overanalyze, but to consider the future, and ultimately, make a decision that leaves you comfortable and able to cover your mortgage, your other debts, and still live the lifestyle you desire.
Buying a home is a huge decision, and answering the questions “How much mortgage can I qualify for?” and “How much mortgage should I qualify for?” is the first step toward successfully navigating the home buying process toward your path to homeownership. Better yet, having a team to help guide you along the way and answer the many questions you’ll have is the best way to assure yourself of a pleasant home buying experience, and a loan that will keep you happy in your home for years to come!
Have questions about the home buying process? Ask the professional that shared this post with you or give us a call at 877-ASK-MMMC (275-6662)