Jan 17, 2020
If you’re beginning the process of looking for a new home, you’ve probably begun asking yourself a lot of crucial questions.
For example, what kind of house do you want?
Where do you want it to be?
Of course, before you begin searching for the perfect home, the most important question you have to answer is, “How much will my mortgage be?”.
How much your mortgage will be depends on how much your lender believes they can risk offering you.
This is why it’s a good idea to shop around for your mortgage. Different lenders follow different guidelines when assessing applicants.
However, every lender will consider the following eight factors when determining how much they can offer you as a mortgage.
This first factor is fairly self-explanatory. Lenders want to know how much you regularly earn from your job as this will give them a great point of reference for how much you can afford to pay them every month.
Obviously, the more you make, the more of a mortgage you can afford.
Just keep in mind that your gross income is what you make before taxes or any other deductions. It should also include any bonuses you receive.
Aside from your main occupation, other sources of income matter, too. Do you do any part-time work on the side? Do you receive disability or Social Security benefits? Child support?
All of these factor into the “front-end ratio”, which is an important topic we’ll cover in just a moment.
Similarly, lenders will be interested in your assets – specifically, your liquid assets – as these could also be used to help pay your mortgage. It also wouldn’t be ideal to, say, cash out your 401(k) to make your monthly payments, but showing this would be an option will still work in your favor.
Other examples of these types of assets include:
You can even list any large amounts of cash you keep on hand, though you’d need to document their sources on your application.
While your gross income and assets tell a lender how much you can spend every month, your debts show them how much you’re already spending.
The more you’re already spending, the less your mortgage will be for as lenders don’t want to risk a default because you depleted your funds.
Debt covers any payments you need to make because of money you’ve borrowed. Common sources would be student loans or credit cards. Debt doesn’t include things like your phone bill or utilities, even though they require regular payments.
Most people won’t have to worry about this factor, but if you own your own business, you may have liabilities that a lender will want to know about.
If you’re a sole proprietor or a partner, you’ll most likely need to disclose any business liabilities during your mortgage application. This is why, if possible, you may want to form an LLC before applying.
Okay, we can now discuss the all-important front-end ratio that we alluded to earlier.
In short, your front-end ratio is the percentage of your annual income that could go toward paying your mortgage. Most lenders will be comfortable with any mortgage that represents less than 28% of your gross annual income.
So, for example, if you make $100,000 a year but need to spend $20,000 of it on your debts, your debt-to-income ratio is 5:1.
That still leaves plenty of room for other ongoing expenses (e.g. groceries, utilities, etc.) and a mortgage that wouldn’t take up more than 28% of your income.
Your back-end ratio is just another name for your debt-to-income ratio.
If you’re applying for a mortgage, you’ll be a much more appealing applicant if it’s below 36%.
Combined, these two ratios are what is commonly referred to as the “28/36 rule.”
Unless you absolutely must buy a house in the immediate future, take the time to bring these two ratios into their respective percentages and you’ll be able to qualify for a much better mortgage.
Your credit score doesn’t affect how much your mortgage will be for, but it does directly affect how much your interest payments will be.
The reason is simple: your credit score tells lenders how reliable you are when it comes to making regular payments.
The better your score, the better they’ll feel about keeping interest low. The worse your score is, the more they’ll need to raise that interest to justify the perceived risk of lending to you.
Once again, if you have some time before you must buy a house, it’s worth working on your credit score. That interest payment will make a massive difference in how much you spend on your mortgage. Even dropping your interest rate by a percentage could save you $1,000 a year.
Finally, your down payment will arguably have the biggest impact on how much your mortgage will be. This is the amount you’re able to immediately put down on the house.
Lenders love to see a large down payment because they never need to worry about that money again. Even with a great credit score, they can’t be 100% sure you’ll make all of your payments. The same goes for a small front-end ratio. Any number of things could happen (e.g. you lose your job) that keep you from making monthly mortgage payments.
However, nothing can affect your down payment once it’s made. The lender gets that money right away and keeps it no matter what.
Therefore, a large down payment can result in a lower interest rate.
At the very least, it will drop the amount you need to pay every month by dropping the total you’ll need to borrow from a lender.
Buying a house is always easier with a real estate agent, but they can also be a lot of help when it comes to better understanding how much your mortgage payment will be.
With SimpleShowing, it’s easy to find an experienced real estate agent in your area, but we can also give your budget some help, too. By buying a home with a SimpleShowing Agent, you could earn up to $15,000 cash with our Buyer Refund program.
Contact us today to learn all about how it works!