It’s one of our most asked questions:
How do you determine how much we can afford?
Don’t worry - it’s not a guessing game. There is a concrete mathematical equation that helps us determine what you can comfortably pay each month without stretching your limits.
During the pre-approval process, we collect the information we need from you to look at your financial situation.
With your permission, we first run a credit report. This report lists trade lines, or accounts. All current debts are listed: car payments, student loans, current mortgage, credit card debt, personal loans, and any other debt you may have.
We also verify your current income with pay stubs and/or tax returns. While this can be a bit more complicated with people who are self-employed or work for commission, it is usually not an issue.
Next, all of your monthly payments are added up, and the total is divided by your monthly income. This gives us a debt-to-income ratio, which helps determine what you type of mortgage payment you can handle.
A general rule for determining how much debt a household can take on is the 28/36 rule. This rule states that a maximum of 28% of the household’s income should go to housing expenses. All debt (including car payments, student loans, and credit cards) should not exceed 36% of income.
This rule generally gives you enough wiggle room to be a homeowner without overextending their budget, so you are able to save money and pay for other items.
Just as important as the number we get from the debt-to-income ratio is your input. Just because the numbers say you can afford a $400,000 doesn’t mean you will want to make that big of a mortgage payment each month. So we often start backwards and ask, “What are you comfortable paying every month?” This gives us a look into how you want to budget your money as a homeowner.
Are you interested in meeting and determining your housing budget? Contact us to begin the pre-approval process!