Loan Affordability | RE/MAX of Abilene | 325-695-3730
How much of a loan can you really afford? Understanding loan affordability is one of the most important rules of home buying. The RE/MAX of Abilene team can help you understand all of this by calling 325-695-3730!
Depending on your individual situation, your budget can affect everything from the neighborhoods where you look, to the size of the house, and even what type of financing you choose. Bear in mind, however, that lenders will look at more than just your income to determine the size of the loan. Likewise, you may find that there are some creative financing options that can help boost your purchasing power.
Loan prequalification vs. preapproval
One of the best ways to determine your budget is to have your real estate agent or lender prequalify you for a loan. Prequalification is different from preapproval, because it is only an estimate of what you'll be able to afford. On the other hand, preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount. What factors are important to lenders?
Banks and lending institutions will use several criteria to determine how much money they'll agree to lend. These include:
Two important ratios
- Your gross monthly income
- Your credit history
- The amount of your outstanding debts
- Your savings--or the amount of money you have available for a down payment and closing costs
- Your choice of mortgage (i.e. 30-year, FHA, etc.)
- Current interest rates
Lenders also use your financial information to figure out two, very important ratios: the debt-to-income ratio and the housing expense ratio.
- Debt-to-income ratio
Many lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit card, etc,) shouldn't exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient.
- Housing expense ratio
It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.