How A Lender Does It | What Can You Afford to Buy


What’s the real method lenders use to figure out what you can afford? There are all these rules of thumb on the internet, but can you figure out the amount down to the penny? How will your debts play into it? What about your job type and how you get paid? Do these play a factor? Spoiler alert, yes they do. Does your credit score change things? Let’s hear the exact method us home lenders use right now. There’s two main steps to the process. One, first we need to figure out what loan box you fit into best. Because they have slightly different rules. Now, number two is we’re going to do some quick math to figure out your max payment for the program you fit best. Once we have your max payment, we can easily back into the home size for that program. And done. It’s really that simple. So number one.  

What Kind Of Loan?

Well there are two main kinds of loans we’re going to talk about today. The conventional and the FHA. A conventional loan is best for people with 720 plus credit scores, and it’s also best if you have a large amount saved for down payment. FHA on the other hand, works great for lower credit scores and savings amounts. And typically you only need at least a 580 credit score here. Now that we know your bucket, let’s get to your max payment. Now, disclaimer, there could be a difference between what you should spend and what you can spend. This video is going to cover the latter. We will figure out, to the penny, what the bank says you can qualify for, using the exact same method the bank uses. I trust that you’re responsible enough to decide what makes the most sense for you and your unique family scenario.  Okay, to do this, we need to know just two more pieces of information. How much do you make per month before taxes exactly? And what are your minimum monthly debts? Those include credit cards, student loans, and car payments. We’re looking for minimum payments here. This will tell us exactly what payment you can afford. We compare your monthly debts to your monthly income.  You might have heard of this before. In the loan world, we call this your debt to income ratio, or DTI for short. This is what decides your maximum house payment. It’s different for each loan type.  

Conventional and FHA Differences

For conventional loans, for these loans half of your before tax income can go towards your house or other debts. Another way of saying this, is 50% of your debt to income ratio. These debts include payments for cars, credit cards, and other loans. They do not include utilities and other types of bills like your phone, gas electric car insurance, etc. If it’s not a debt that shows up on your credit report, it’s not part of your debt to income ratio.   

Here’s A Quick Example

If you make five thousand dollars before tax, and have no car payment, credit cards, or student loan payments, then all one half of your income can go towards your house. A two thousand five hundred dollar house payment is what you could qualify for. Let’s say you have a five hundred dollar car payment. This drops your max payment to two thousand. Easy right? Now FHA, it works the same as above. The big difference though is that if you have a better credit score, you can go a bit higher than 50% of your income. I’ve seen these approved up to 56%. Now there’s one last, very important, thing you must know before we’re done with this part. For both the conventional and FHA loans we just covered, they each have an automated system lenders will run your loan application through, that can lower the allowed debt to income percentages we talked about above. They get lowered based on other risk factors.  So the 50 and 56 percent of your income towards your home and other debts, is not guaranteed. The risk factors that can lower these, are typically a combination of some of the following: A low credit score, high debt balances, spotty work history, and other items in your application that pose a risk. Typically it’s not just one thing. But what is known as layered risk, or multiple risk factors, that will lower the allowed debt to income ratio.  This is why it’s always important to talk to a lender. They can get your whole picture and run it through these systems to ensure the exact amount you can afford. Other concerns I’ve heard in 17 years of doing this: “Nick, I get paid funny. Does that change anything?” If your salary or full-time W-2 employment, typically no. We can use the rules above.  However other types of income like self-employed, part-time, second jobs, contract work, commission employment, bonus income, babysitting, giving blood, etc. We’re gonna need a two year average. In any of these cases, it’s best to talk to a pro to make sure you’re doing it right. As the rules can be nuanced for different loan boxes.  

What Other Things Factor Into The Payment?

Your monthly home payment will consist of the following: principal, the portion of the payment that goes to paying down the loan size, interest, which is just a crazy clever way of spelling bank profit, property taxes, home insurance, mortgage insurance, if you don’t have 20% down payment, and possibly an HOA payment if you live in a condo or development that has other amenities covered by an HOA. Wow! That’s a lot!

A Lending Hand for Financing Home Mortgages

Spire Financial (A Division of AmeriFirst Financial Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.

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Disclaimer


Spire Financial, a division of AmeriFirst Financial, Inc., 1550 E. McKellips Road, Suite 117, Mesa, AZ 85203 (NMLS # 145368). 303-595-0110. © 2022. All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions and limitations apply. AmeriFirst Financial, Inc. is an independent mortgage lender and is not affiliated with the Department of Housing and Urban Development or the Federal Housing Administration. Not intended for legal or financial advice. Visit https://amerifirstloan.com/pages/state-licensing for all state licenses information. Visit NMLS Consumer Access at https://www.nmlsconsumeraccess.org/

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