So far in this series “you don’t make money when you sell real estate you make money when you buy it” we’ve covered your NEEDS as well as your WANTS and in today’s video it’s all about understanding how much home you can afford.
Now like it or not, there are two guidelines 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 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 online. 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.
On the other hand you could also talk to a couple of mortgage brokers and specialists to see if there’s a fit and the good news is that I have a couple I can recommend that have done a great job with my past clients saving them time and money.
Just head over to planwithmike and schedule your one on one call and make sure to watch for the next video. Chat with you soon!