Secret #3: Understand How Much Home You Can
Afford.
Like it or not, there are two
guidelines bankers and mortgage lenders use to determine how much loan you
can afford.
The first guideline is the Payment To
Income Ratio. This guideline compares your income, or your total
household income, to the amount of mortgage payment you’re considering.
To calculate the “payment” part of the
formula, the lender will take the mortgage payment (principal + interest)
and add to it property taxes and insurance. Hence the term “PITI”
(principal, interest, taxes, and insurance).
Usually lenders will loan up to a payment
amount of 28% of your total household income.
But before you think you’re home free,
there’s something else you need to know…
It’s called the Debt To Income Ratio.
Debt refers to ALL the major monthly payments other than your mortgage
payment (PITI). To arrive at this amount, the lender will consider…
• Your car payment.
• Your credit card debt and payment.
• Any IRS liens or payments due.
• Any other payments and debts you have (boat,
second home, etc.)
Then, they’ll compare your total debt to
your ability to make current payments with your new home loan added into the
equation.
Now, here’s the “stickler.” Each mortgage
company sets different limits on your Debt To Income ratio, which is
why it’s critically important to find a MOTIVATED LENDER.
Don’t follow the “canned” financial advice
like you see on TV. Most of that advice is “rule of thumb,” and designed
for the lowest credit rating and highest interest rates.
Think about this…
If you spend two or three days to find a
loan that saves you $40,000 to $150,000 over its term, your time is WELL
WORTH SPENT! Doing a little homework on your own will literally save you
thousands over the term of your loan.
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