American home loan capacity calculation

How much can be borrowed is ultimately a matter of Debt to Income Ratio. DTI is simple by definition: DTI = Monthly Debt/Monthly Income

To figure out how much we can borrow, we use the above formula to figure out the maximum monthly Mortgage Payment we can afford, and then combine the current interest rate with the length of the loan to figure out the maximum Mortgage Payment we can afford. This is easy to do in the loan software, but how do I do it in my own estimation? Recommendations are as follows:

  1. Determine your income first. For the first time to buy a house and raise the number of loans to the customer, the general income composition is relatively simple, is the income on the payroll, so the income here just need to point out, is the bank review loan to see the income is pre-tax income. If you own your own business or have an investment property, it is recommended to prepare a two-year tax form and find an experienced loan officer to calculate it for you.
  2. Reconfirm that the majority of monthly debt and income is known and constant. Such as car installment, college tuition installment and child support. And customers generally have an accurate idea of how much their credit card bills will cost each month when they apply for a loan, so it’s not hard to estimate.
  3. The hard things to estimate in monthly debt are the principal payments on the home you’re buying, interest payments, real estate taxes, and insurance. The following backward method is recommended:

1) estimate the highest price of the house you want to buy based on how much down payment you have, your requirements for the house and the local housing price.

2) calculate the loan amount by deducting the down payment from the estimated house price.

3) estimate the Monthly Mortgage Payment (P&I) of the loan with the loan amount and the current 30-year interest rate. The loan of 30 years is chosen because the loan with a short term, such as 15 years, will have a high Monthly Mortgage Payment despite the low interest rate, thus affecting the maximum loan amount available.

4) estimate the property tax, housing insurance, and HOA Fee based on the house price and local conditions.

5) if the down payment is less than 20%, please estimate the monthly loan insurance.

After these figures are determined or estimated, the DTI can be calculated. According to different loan situations, Banks have different requirements for DTI. Conventional loans generally have the following three conditions. In either case, the smaller the DTI is, the stronger the loan capacity is. If the DTI is too high, please lower the house price or prepare more down payment to lower the DTI.

  1. If it is conventional Conforming Loan (Loan amount is less than or equal to $417000), the general Loan bank in DTI < 45% of the time can borrow money, DTI in the need for an analysis between 45% to 50%.
  2. If the loan amount is greater than $417,000. If it is a True Jumbo Loan beyond the local High Balance Loan Amount, many lending Banks will require the DTI to be 43% or less according to the recently issued QM rule.
  3. If the Loan to value is more than 80%, both Banks to help you to pay the Mortgage insurance or himself, basic all Mortgage insurance company requirement is DTI is not greater than 45%, so even if Conforming Loan, also please ensure the DTI < = 45%.

The above approach is to provide a self-assessment approach to the customer. An experienced Loan Officer can help the customer increase the maximum amount of money available by selecting specific Loan products, etc. Therefore, if you estimate the DTI to be tight or high, it is recommended to contact an experienced Loan Officer to help you.

American home loan capacity calculation

  1. Income: the pre-tax income is used to estimate how much money can be borrowed. The appropriate amount of money can be borrowed. Net payroll income is after-tax income minus 401k and so on. After buying a house, the interest on the loan and the property tax can be deducted, but I do not recommend considering this part of the income, because this part is usually the second annual tax to get back, and the mortgage is every month to pay, and after buying a house, there are tinkering and other miscellaneous extra costs, even if these two offset each other.
  2. Or monthly liabilities are generally included

1) Mortgage Monthly PITI: Mortgage principal, interest, property taxes, and Mortgage insurance. Including property to be/being purchased.

2)HOA/Condo Fee if any: the management Fee of the housing community.

3)Credit card minimum payment: the minimum monthly payment on a Credit card.

The monthly payment amount for a Car loan/ lease.

A: this is the monthly payment for the Education Loan.

A) Monthly Child Support/Alimony amount if applicable.

7) Monthly Mortgage Insurance amount if applicable.

  1. Job/income stability.

1) Base salary: the basic salary on the payroll.

2) Bonus, premium income, Commission, etc. : generally requires two years of history to demonstrate stability and sustainability.

3) income of Investment Property: generally, tax records, lease contracts and other documents are required.

4) self-employed Income: generally speaking, it requires two years of tax records for calculation.

A clear divorce/separation agreement, proof of collection, and at least 3 years of sustainability are required.

6) Social Security Income/Pension, etc. : Social Security Letter, Pension Letter, etc.

7) other income: there are many types, and the overall requirements are two years of history and three years of sustainability.

Income generally does not include:

1) undeclared cash receipts such as tips.

2) government unemployment subsidies.

3) other incomes that do not have a two-year history or cannot prove sustainability for the next three years.

  1. Property mainly refers to the amount of property that can be realized immediately.
  2. Financial support from other sources under special circumstances.

To calculate the appropriate loan amount, please refer to the following principles:

  1. The aforementioned income minus expenses is greater than or equal to 0. It can also be temporarily less than 0 if wages are expected to rise significantly in the foreseeable future and the capital shortfall is prepared before wages rise.
  2. It is recommended to leave 3-6 months for immediate realization of property; It is recommended to leave 9-12 months for immediate realisation of assets. In the same situation, if you have a stable job/income, you can put more down payment to increase the house price you can buy.
  3. In special circumstances, other financial support must be a very reliable source, such as support from parents, equivalent to an increase in cashable assets.

For example, some people are optimistic that they can keep the balance every month, because their salary will increase in the future, while the Monthly Payment of loans will not. Some people are more conservative and feel they have to save another few thousand dollars a month to be comfortable.

Robin Bell

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