Finding your dream home is exciting. But finding out you can’t afford your dream home can be depressing. Don’t fall into the trap of shopping for something you can’t afford. Find out how much you can really afford to borrow when buying a Metro Detroit house before you start the search. Your real estate agent is there to help guide you to great lender resources if you don’t already have one in mind.
Percentage of Income
Home loan lenders calculate your loan affordability based on a percentage of your income. But it isn’t just the loan that is factored into this calculation which is called a debt-to-income ratio (DTI Ratio). The DTI ratio adds all your monthly debt obligations such as car, credit cards, personal and student loans and then considers the total amount of the loan as well.
There are two ways the lender looks at this. The first is all monthly debt other than the home loan; this can’t exceed 28 percent of your total monthly gross income. When the loan is added in, this ratio can’t exceed 36 percent of your income.
Of course, the DTI ratio is just one component the lender is looking at. The loan will be contingent on your credit score, payment history and the total amount of outstanding debt. The higher your credit score the lower your interest payment. This can affect the house you want to buy because if you can keep the interest rate as low as possible, your monthly payments on the same loan value go down. That means the 36 percent is getting you more house for your debt.
A good loan officer will look at various things to help you bring the interest rate down. He might recommend paying some credit cards off. He might also recommend putting more down on the house to qualify for better interest pricing. Talk to your lender about various programs to help new home buyers and qualify for as much home as you can afford.
Shopping for the Best
Don’t assume every lender is the same. Some lenders such as banks are very stringent about loan application qualifications. Brokers may have other lenders with different guidelines making lower rate loans more accessible to new borrowers with less than perfect credit. Talk to your real estate agent, asking for mortgage lender referrals.
Keep in mind that you don’t want to put applications in at a ton of places because this could adversely affect your credit score if done in a short period of time. Instead, put together a package of what is required in the loan and ask the lender to review things. If you like what solutions they offer, then go forward with the full credit and loan application.
What You Know You Can Afford
Don’t be lured into going above your budget because a lender says you qualify for a bigger loan. Responsible borrowers already have a dollar amount in mind and are happy to search for a home they can afford that is less than the maximum loan amount. Just because a lender says you can afford a $3,500 monthly mortgage payment in Metro Detroit doesn’t mean you have to cap that out. You might very well feel more comfortable paying a maximum of $2,900 per month because you realize the upkeep of the home has expenses that go up as the size of the home goes up too.
A good real estate agent won’t try to sell you more home than you need just because you can afford it. Talk to an agent about what your personal caps are and develop a plan to get you in the house you love for the monthly payment you want.