How do I qualify for a loan?
Before you start looking at homes, you need to have some idea of what you can afford. It can save you much time and trouble by making certain you are looking in the correct price range.
There are three main factors that will weigh into how much home you can ultimately afford:
- your monthly income (before taxes);
- long-term debts;
- cash you can accumulate for a down payment and closing costs.
Income - Lenders generally say that housing expenses should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. The housing expenses include monthly mortgage principal, interest payments, property taxes and homeowner's insuranceYou can count as income not only your steady employment but also:
- overtime bonus and commissions (average for one - two years);
- net income from self employment;
- social security, veteran's benefits and retirement;
- alimony, child support and income from public assistance programs;
- interest and dividend income; rental income after deducting expenses and debt payments;
- income from trusts, partnerships, professional corporations and so on.
Debts - Lenders also take into consideration your regular monthly debts and obligations: other real estate loans, installment loans (bank loans, auto loans, tuition loans, etc), revolving accounts, alimony and child support. Your housing expenses plus long-term debts should not be more than 33 percent to 36 percent of your gross monthly income. Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future.
Down payment - Lenders expect homebuyers to have enough money available to make the down payment - usually up to 20 percent of the asking price for the house and to pay closing costs (3 percent to 6 percent of the loan amount). You may consider the following sources for a down payment: savings, stocks and bonds, mutual funds, employee savings plans, Individual Retirement Accounts, etc. Some mortgage programs allow to use a gift of money from parents or relatives that need not be repaid.
