How much home can I afford?

The first step in the mortgage process is prequalifying, which will determine how much a lender will lend you. Most lenders use national guidelines to determine the maximum amount that they will lend. Within the context of these standards, some lenders choose to be lenient and flexible, while others are strict. To prequalify you, lenders look at the following information:

• Employment History
• Credit History and Scores
• Monthly Income and Expense

Unemployment is one of the two largest causes of mortgage foreclosure, the other being divorce. Ideally lenders like to see an employment history of 2+ years with the same company, or in the same line of work. A few job changes with increases in salary and responsibility are not frowned upon. Stability of income is a very important factor to mortgage lenders when they prequalify you. For salaried employees, lenders look at job history for at least the past two years. For those who are self-employed, considered if you own a 25% or greater interest in the business that employs you, lenders will look at profitability and cash flow of the company and also personal income.

Credit history and scores can play a big role in the prequalifying stage in the mortgage process. Lenders order mortgage credit reports from local credit bureaus, which gives individual credit history and scores. Credit bureaus collect information from retailers, banks, finance companies, mortgage lenders, and a variety of public sources on all consumers who use any type of credit, including credit cards, car loans, mortgages, personal loans, and charge accounts. The credit score is based on a statistical analysis of your credit history. Factors that determine your credit score vary from company to company, but generally include:

35% History of Past Payments - on all types of credit
30% Amount of Credit Outstanding - balances on your credit cards and other loans compared to the credit limits for those loans
15% Age of Credit - of all credit cards and charge accounts
10% Mix of Credit - car loans, charge cards, mortgages, etc.
10% Recent Credit Inquiries - suggesting that you are seeking additional loans or credit cards

The credit score many lenders use is the FICO score. FICO scores range from 400 to 900, with 900 being the best score. The higher the score, the less likely there will be a default on a mortgage. Therefore, the better the score, the easier it is to prequalify. These scores are viewed as very accurate predictors of future delinquencies.

The size of the mortgage that can be afforded monthly, can be estimated through two essential ratios: housing ratio and debt ratio. Housing ratio is determined by your total monthly mortgage payment divided by your total monthly income. Debt ratio is determined by the sum of your total monthly mortgage payment and other fixed monthly debt payments divided by your total monthly income. If these ratios are too high, lenders may decide to deny the application. For prequalification purposes, the maximum housing ratio of 28% and a maximum debt ratio of 36% (28/36) used to be national guidelines. However, today, you can get by with much higher percentages, if you can show that you can make the payment. If you use an experienced mortgage broker/loan consultant, they should be able to find a lender which is right for you, and get you prequalified for the most money, and the highest ratios.

Some lenders evaluating a credit application are not tied down by strict industry standards. They will look at your loan request and see if it makes sense. If further explanations of any situation that will make your application look better, then by all means do so. Document all claims and explanations in writing if possible.

To discuss prequalifying for a mortgage loan, please contact me at: