What Can I Afford
When most people make the leap from apartment living to buying a beautiful Sarasota home or a condo, the first thing they ask themselves is how much can they afford. But figuring out this magic number takes more than just counting the dollars in your bank account and adding in a bit more for any investments. There is a whole range of concerns that need to be taken into consideration when figuring out your price range. Let’s take a closer look at some of the things you need to take into consideration before you head to the bank to apply for that mortgage.
While there is no hard and fast rule on figuring out exactly how large of a mortgage you can apply for, especially in this day and age of Internet-based lenders which have made the lending process even more competitive then ever before, the basic method banks look for is that no more than 28 percent of a person’s gross income is to be spent on their mortgage payment. The bank will also take a long, hard look at your debt load. Ideally, the bank wants to make sure that you do not spend more than 36 percent of your gross income on all of your debts combined, including your new mortgage. If your currently spending far more than that on debt, you’re going to want to pay it down as much as you can before you approach a bank for a mortgage.
Make sure you shop around for a mortgage. Every bank uses a different mathematical formula to decide what you can afford and what you can’t, and this is more true now then ever before. Lending websites like LendingTree.com and banks like ING now offer extremely competitive methods of lending that have made your local bank much more flexible when it comes to lending money.
Banks, either Internet or physically-based, do have a set of criteria that they will sort through when trying to figure out the maximum amount of money they feel comfortable with loaning you. They usually include things like the amount of money you make each year (gross income), the amount of cash you have on hand to handle things like a down payment, closing costs, fees and extra charges, how much debt you have overall, what your credit report looks like, which kind of mortgage you’re looking to get and what the current interest rates are. Most banks will simply input all of this into a computer program and they will receive a risk assessment. It is then up to the loan officer to consider if this risk is one the bank is willing to take or not.
Another tool that many banks use to figure out what you can borrow is called the income to expense ratio. This handy little number takes into account not only your possible monthly mortgage payment but also all the other expenses that go with it like a homeowners association payment, property taxes and insurance, and then compares it to your income. Most banks have a cut off line where if your ratio is too low, you wouldn’t be able to be approved for that large of a mortgage. In general, it shouldn’t be more than 40 percent.
If you don’t have a perfect credit score, and let’s be honest, who does, the bank won’t kill you on it in most cases. If you’ve filed for bankruptcy, it takes ten years for it to clear from your credit report, but depending on the circumstances involved, the bank will still consider your application. If your credit problems were due to a divorce or losing your job, the bank will in most cases be very lenient on you and they might not even take it into consideration if you’ve reestablished a solid credit rating. However, if you simply went out and spent money and overextended yourself, you shouldn’t expect any special favors from the bank.
Figuring out what you can afford is tough. The banks seem to use a secret formula to decide how big of a risk you are and, from the surface, the whole process can seem a bit unfair. But if you maximize your current situation and have a good grasp of what you’re getting yourself into, you can come out of it with exactly what you want. GBrey
