how much can they afford?

Qualifying Clients Sean D. Cohen/Prosperity Mortgage There are two ways to figure out if someone income qualifies for a loan, but the debt ratios allowed for programs can vary, depending on the lender and the borrower’s other strengths. I. You can figure out how much house a client “maxes out” for by applying the following formula: A. Get the total gross income for a month from all applicants (borrowers). B. Multiply by the maximum debt ratio allowed for a specific loan program (for this example use 45%). C. Subtract minimum outgoing payments for auto’s, credit cards, and don’t forget to check for child support/alimony. Also, if borrowers own real estate, count those payments too, but only 75% of leases count towards washing those payments. Now you have the total payment (PITI) that the client(s) can afford. The last, very important step is to estimate monthly taxes and insurance for that range of property, and subtract those from your PITI figure. Now you can enter your final figure as the payment in a financial calculator (payment must be entered as a negative). If you can guess the interest rate (try to be within .25%) and the term of the loan (usually 360 months), then you can use the calculator to figure the maximum price home (PV/principal value) that the borrowers can afford. II. The other way to figure a debt ratio is to ask the client(s) what maximum payment (including tax and insurance) they don’t want to go over per month. This will give you an actual figure for outgoing home payment that you can add to their other debts to determine total outgoing payments. Then you simply divide that number by gross monthly income to figure out their debt ratio. Now you can check the loan program to see if they qualify for that payment. If so, you can plug in the 3 variables you know (payment, rate, and term) to find the fourth variable – principal value – which will tell you how much home that payment buys. The two tricky parts to these equations is remembering that a calculator does not figure tax and insurance. Also, if the person is putting money down as down payment, then you must subtract that amount from the final PV principal value so you know how much house they can really buy. Sean D. Cohen Mortgage Consultant, Prosperity Mortgage; cell 757-404-3387 sean.d.cohen@prosperitymortgage.com