How Much Do I Qualify For ?

Statistics show that over 80% of all people looking to buy a home begin their search on the internet.

This is a great tool for homebuyers to see what is available in the market.

BUT -- I think it is even MORE IMPORTANT for buyers to FIND OUT HOW LARGE A MORTGAGE THEY CAN

GET/QUALIFY FOR BEFORE they shop for a house. Real Estate Agents know this is true, that is why they always try to get a client "pre-qualified" before they start showing homes to potential buyers.

It can be very discouraging for person to find their "dream home" and then find out that they do not qualify for a mortgage.

So, with this in mind,  I will give all you potential buyers, especially all you 1st Time Buyers a quick course in Underwriting 101.

These days, most mortgages are underwritten based on Income Verification

The formula used to qualify a borrower is really simple:  Gross (before taxes) Monthly Income is multiplied by a %--Usually 46-48%                                            x 48%  = Allowable Monthly Payments for all debt.

Example:  Gross Monthly Income  (Salary, Overtime, Regular Bonuses etc). = $5000 x 48% = $2,400.

From this amount an underwriter will deduct monthly payments appearing on the credit report - $400

Then deduct the MONTHLY Real Estate Taxes AND all insurances- Hazard, Flood, PMI             - $600

This leave an allowable monthly mortgage payment (principal & interest) of                          $1,400/mo.

Now the "tricky" part. Next Divide $1400 by the cost per $1,000 borrowed. In order to do this you have to know what the "cost per $1,000" is. The cost per $1000.00 at a rate of 5.50% (today's conforming rate) is just $5.68   This is based on a 30 year mortgage, shorter terms will have higher cost per $1,000.00

JNow, take out a calculator and enter $1400 divide by .568% = $246478.87 Round this DOWN $246,000

OK you're saying but what if mortgage rates go up ?  Let's see the cost per $1,000 at 5.75% = $5.84

Now do the same calculation:  Enter $1400 divide by .584% and you get $239.726 which you can round UP

to:                                                                                                 $240,000 Max Mortgage.

As you can see, a rate change of .25% does not change the mortgage amount all that much.

There are variables to this formula, such as Rental Income, Social Security, Dividend Income etc. That is why I always say to speak with a mortgage expert before you begin to shop. He/She can save you a lot of time and possible frustration and it only takes a few minutes to pre-qualify you.

Happy House Hunting !

Ken Nelson

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