| Unlike most home buyers, you want to buy a house in | | | | involve only increasing your income or increasing your |
| a particular price range, not simply the house that you | | | | down payment. If you can increase your income to |
| can afford under your current financial circumstances. | | | | some extent, and put the extra money away for your |
| You want the house of your dreams, and you want it | | | | down payment, you just might be able to reach the |
| now. | | | | underwriting goal. Let's say that you increase your |
| Most articles about mortgage affordability start with | | | | income and are able to save another $10,000 for a |
| your income and your debts, and then proceed to tell | | | | down payment. If you can do that, your monthly |
| you how much of a mortgage you can afford. In this | | | | income requirement is reduced to $6807 ($81,686 |
| article we're going to start with the price range of the | | | | annually) at 28% to $7624 ($91,488 annually) at 28%. |
| home you want, and then figure out how you can | | | | Keep plugging numbers into that calculator and, |
| afford it. | | | | chances are, you'll find a way to reach that 25% to |
| The four major factors in determining the amount of | | | | 28% threshold. Maybe it's a combination of increasing |
| credit a lender will extend to you are your income, your | | | | your income, selling off some things, and asking |
| debts, your credit history and, in the case of | | | | parents or relatives for money. |
| mortgages, the amount of your down payment. If you | | | | Let's say that you've reach the threshold. What about |
| currently don't qualify for a mortgage for the house of | | | | your debts? Another component of underwriting is |
| your dreams, you're going to have to change one or | | | | your debt to income ratio, which is the amount of |
| more of those factors. | | | | long-term debt payments as a percentage of your |
| Let' s use $250,000 a hypothetical price of your dream | | | | monthly pre-tax income. Long-term debt is your |
| house. Let's also assume that you have $18,000 for a | | | | mortgage payments, car payments, credit card |
| down payment, so you're borrowing $232,000. If we | | | | payments or any other regularly scheduled financial |
| use a monthly mortgage calculator, we find that the | | | | obligations. A rule of thumb is that the debt to income |
| monthly payment on a $232,000 mortgage is $1390.95 | | | | ratio should be 33% or better. If you've managed to |
| at 6% on a 30 year fixed. This is assuming zero | | | | increase your income to the $7021 a month mentioned |
| property taxes and zero insurance payments. If you | | | | earlier, the total of your mortgage payment and other |
| know what the property taxes would be on your | | | | monthly debt payments should not be more than |
| dream house, plug that number into the calculator, and | | | | $2338 per month. If your mortgage payment is the |
| do likewise for insurance. | | | | $1966 per month figure mentioned earlier, you're left |
| If you don't know the property tax and insurance | | | | with just $372 a month for car payments, credit card |
| costs, let's just use $900 a year for insurance and | | | | payments, or other debt payments. |
| $6000 a year for taxes. Using the mortgage calculator, | | | | Some lenders will set the debt to income ratio at even |
| we now find that the taxes and insurance have raised | | | | lower than 33%, while others will be more lenient and |
| the monthly payment to $1965.95. (Makes a great | | | | go as high as 38%. Be cautious about lenders who are |
| argument for living in a low-tax state, doesn't it?). | | | | too lenient, though. In the last couple of years we've |
| Can you afford to pay $1966 a month? Even if you | | | | seen what's happened to millions of people who got |
| think so, the underwriter who will be examining your | | | | mortgages under "relaxed" standards. |
| mortgage application may not. The rule of thumb for | | | | OK. You're working 50 hours a week, or you sold your |
| underwriting is that a mortgage payment should not | | | | '69 Camaro, or your parents gifted you $5000 as an |
| exceed 25% to 28% of an applicant's monthly pre-tax | | | | advance on your inheritance, or maybe you did all |
| income. So, to qualify for a $1966 a month payment, | | | | three. You're not out of the woods yet, though. You still |
| you (or you and your spouse) will need to have a | | | | have your credit history and credit score to deal with. |
| monthly pre-tax income of $7021 ($84,252 per year) | | | | Your credit history and credit score will play a major |
| at 28% to $7864 ($94,368 per year) at 25%. | | | | role in determining the interest rate you get on your |
| If your monthly household income is already at these | | | | mortgage. If your credit score is below 620, you're |
| levels, you can move on to your debts. If not, you're | | | | going to have a hard time getting a mortgage, |
| going to have to do one of two things: make more | | | | especially these days. If it's between 620 and 700, |
| money, or get a larger down payment. | | | | you'll likely get the mortgage, but you won't get the |
| Can you work a second job? Is overtime available to | | | | best rate (which is the one you always see |
| you where you work? Can you find a way to get | | | | advertised). If your score is over 700, you're going to |
| promoted to a higher-paying position? These are the | | | | get a very good rate and, if your score is close to 800, |
| obvious questions. What's not so obvious is that, even | | | | you'll get the best rate. |
| if you increase your income to the required level, you're | | | | While you're getting your other financials in order, get a |
| going to have to be at that increased income level for | | | | copy of your credit report. Look for mistakes. Look for |
| at least a year. Underwriters want to see at least one | | | | anything that reflects poorly on you and see if the |
| year's tax return showing the increased income level. | | | | problem can be fixed, and the issue removed from |
| Ideally, you'll want to show them three years. | | | | your report. |
| What if there's no chance of increasing your monthly | | | | You may not have any problems on your credit report, |
| household income to those levels? If that's the case, | | | | but still have a major problem in that you don't have |
| you might want to ask yourself if you should really be | | | | any history of making debt payments. That's right: not |
| buying that house. If it's still your dream and you want it, | | | | having borrowed money before can work against you. |
| then you'll need to increase your down payment in | | | | If you think about it, though, it makes sense. How is a |
| order to reduce the amount you're borrowing. | | | | lender supposed to know how you'll handle your debts |
| Do you have an extra car you can sell? What about a | | | | if you've never had debts before? If you're in this spot, |
| motorcycle, boat, hunting cabin, or any other luxury | | | | get a credit card, pay for some purchases with it, and |
| items you own? | | | | pay the balance promptly. |
| What about your parents or other relatives? Would | | | | With the right strategy and enough effort, you can get |
| they be willing to give you money for the down | | | | the home you really want. However, be sure to not |
| payment? By law you cannot borrow money from | | | | neglect other aspects of your life, such as |
| them for a mortgage, but they can legally gift you | | | | entertainment, hobbies, or vacations. There's more to |
| money without you having to pay tax on it. | | | | life than paying bills. |
| Reaching that 25% to 28% point doesn't have to | | | | |