If you are new to the real estate market, the cost of a home may appear daunting. You may feel that you cannot qualify for any home loans, based on your income. However, lenders have a logical and clever way to formulate the best loan amount for you. It is possible to own a home, even with a limited budget. Lenders take your unique income and financial background to create a loan package perfect for your monthly budget.
The Debt-To-Income Ratio
The main financial formula that lenders use to determine your maximum home loan amount is a ratio of debt-to-income, or DTI. Your household’s gross, pre-tax income is added up. It is then compared to your non-housing and housing expenses to find a manageable budget for a home loan. In general, a high income or low debt allows you to finance a larger loan amount, but each situation is entirely unique in the real estate world.
What Qualifies As Non-Housing Expenses?
Lenders understand that you have other financial commitments that require a monthly payment. Non-housing expenses typically include child support, student loans, alimony and car loans. These monthly debts are usually fixed amounts, giving the lender an idea of your financial limits. If you only have a few of these non-housing expenses, your chances of a larger home loan amount increases. You have more available monthly cash flow to dedicate to the home loan in these cases.
Federal Housing Administration’s Guidelines
Lenders do have monetary lending limits as set forth by the FHA, or Federal Housing Administration. Prospective homeowners still need ample funds outside of the mortgage payment for everyday needs, from groceries to paying the electricity bill. To avoid predatory lending practices within the mortgage industry, the FHA regulates that home loan payments cannot exceed 29 percent of a household’s gross income.
To fine-tune this law, the FHA also took non-housing expenses into consideration. If you add your monthly home loan payment and non-housing expenses together, the total amount should not exceed 41 percent of your gross income. This law protects homeowners from taking on too much debt at any one time, especially if a lender is questionable.
Additional Decision Factors
Lenders can alter the home loan’s amount and interest rate slightly if you have a large down payment saved up or an extremely high credit score. Good credit histories still play a large role in determining loan amounts and corresponding low interest rates. Overall, lenders must look at your entire financial picture to make a fair and well-informed decision on a final loan amount.
For more information about this subject or about our loan programs please contact us at 713-373-0345 or by email firstname.lastname@example.org
NuHome Group 713-373-0345
1445 North Loop West Suite 105 Houston, TX 77008
Frank Marta NMLS# 245813/835196