Regardless of what style, size, or even color home you’re looking at one question will need to be addressed before scheduling those first viewings. How much do I qualify for?
Homes are generally advertised with the asking price rather than other factors such as monthly payment or down payment. Thus overall price is the main number most buyers I come across are interested in. Unfortunately we need to work out a few other things before we can determine your maximum sales price. So over the next few articles I’ll be discussing the following:
- Determining maximum monthly mortgage payment
- Items included in your monthly payment
- Down payments and allowable gifts
- Maximum Mortgage amount or purchase price
Part One: Determining maximum monthly mortgage payment.
Every type of mortgage follows a very similar formula to determine your maximum payment for one simple reason: statistics. If you look at it from the lenders point of view money lent out is money at risk. Statistics tell their investors how much of your gross income can be used for housing without overburdening you and putting the mortgage at risk. So what is the industry standard formula? Simple, 33% of your gross monthly income is your maximum allowed monthly payment.
Let's practice.
Bob's pay stub says he makes $825 a week before the government gets their dirty little hands in the cookie jar. So monthly his gross income is $3,300.
$825 X 4 weeks= $3,300.
If we now take thirty three percent of his monthly gross we get $1089.
$3,300 X .29= $1089
This is what Bob qualifies for monthly, assuming he doesn't have a lot of long term debt.
Long term debt may be defined as any recurring monthly payment that will take longer than 6 months to pay off (car loans, student loans, credit cards, etc).
In this case a separate formula is used where we begin with 42% of Bob's gross income We then subtract the monthly installments of the debt from the total. Let's say Bob bought a new pick 'em up truck last year and pays $349 for it every month. Also he still owes for student loans to the tune of $175 per month and his credit card minimum is $30. We already know the gross income so:
$3,300 X .42=$1386
Now we subtract the totaled debt:
$1386 - $554 ie(349 + 175 +30) =$832
and we have our new maximum payment.
I hope this was helpful. Try the link for a free tidy little worksheet to make these calculations and watch for my next article: Items included in your monthly payment.
Mortgage Payment Worksheet
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