How Much Mortgage Can I Qualify For?

Hello and welcome to my How Much Mortgage Can I Qualify For blog. Let me start by introducing myself. My name is Chad and I am a 20 year veteran in the mortgage business.

The reason I decided to set up this blog is because I am tired of seeing mortgage sites out there with so much misinformation. It seems like most of the sites on this topic just stick some monthly mortgage calculator on there and have you punch in some numbers and poof here is the magic number of how much house can I qualify for.

Unfortunately, when you are actually dealing with a lender it is not as simple as that. There are several variables that go into determining how much mortgage can you afford.  However, if you are curious to see what number it spits out, I have them on this site. Just remember, the calculator will not give you the an accurate answer, only a general ballpark of what you could qualify for.

There are many different types of loan products, and they all have different criteria. Some loans may allow for higher debt ratios, lower credit scores, or lower down payments.

Something else that seems to never be taken into considerations is that most sites will just show you “How much mortgage can I qualify for”. What you really need to also educate yourself on is “How much mortgage can you afford”.

There is a big difference between them. What you qualify for is the amount a lender will lend you. What you can afford is another thing. Some things are not simply just numbers. You need to make sure that you take into consideration external factors that could affect your ability to pay your mortgage so that you don’t become another foreclosure statistic like so many people have in the last couple of years.

I will be doing several more posts below breaking down the different types of loans and how to qualify for them. I will also show you how a lender looks at your credit scores and which loan will work with lower credit scores.  I will also show you how lenders look at your income and debts to come up with an amount they will lend you for a mortgage. And I will definitely answer the questions, “How much mortgage do I qualify for” and “How much of a mortgage can I afford”.  Just keep scrolling down to get all the facts.

Do I qualify for a home loan with my credit, and what mortgage can I qualify for if my credit is not perfect?

The first thing you need to look at when trying to determine “How much mortgage can I qualify for” is your credit.  In today’s lending environment credit scores matter more than ever.  If you don’t have the required credit score you will not get approved, no matter how strong everything else looks like.

The loans with the easiest credit requirements are the government loans (FHA, VA, and USDA).  These loans require that at least 2 of your 3 credit scores are 600 or greater.  They will also allow for higher debt to income ratios (I will address those in the post below).

They will also have lower down payments.  The FHA requires a down payment of 3.5%, while the VA and USDA loans are 100% financing.  The all allow any down payments or closing costs to be gifted by a family member, nonprofit agency, or a close friend.  You can also roll all your closing costs into the loan to limit your cash out of pocket.

The only draw back of these loans is that the FHA loans have loan limits (Most areas of the country are capped at $271,000).  The USDA loan has income limits (Depending on where you live and how many people live in your household and also does not work if you live in a major market).  The VA loan is for active military, honorably discharged armed services members, or people in the National Guard.

What kind of mortgage can I qualify for if I don’t meet the eligibility requirements of the government loans?

If you don’t meet the requirements of the government loans, you will need to qualify for a conventional mortgage.  A conventional mortgage is a little tougher on credit and down payments than a government loan.

For a conventional loan you will need at least 2 of your 3 credit scores to be 640 or greater.  You will also need to put a down payment of 5% of the sales price.  They also don’t allow for your down payment to be gifted.  It must come from your own funds.

The good thing about conventional loans is that they don’t have any of the drawbacks I mentioned about the government loans.  Everyone can qualify, there is no income or geographical limits and your loan amount is not capped.

Also, I have a lot more information about these loans on my main website.  It gives a lot more detail on each of these loans.  Click the following link to get a little more information on these loan products.  http://mortgagehomeloaninfo.com/

Assuming you are past the credit part of trying to determine “Can I qualify for a mortgage”.  Lets take a look at the next post where I will show you how to properly calculate your debt ratio and how much mortgage you can qualify for.

When trying to determine “How much mortgage can I qualify for” or “Can I qualify for a mortgage” you must take a look at your debt ratios. 

What is a debt ratio? 

A debt ratio is basically a comparison between your monthly debt payments and gross income.  You will see a lot of talk on the internet that there are 2 debt ratios you need to be concerned with.  And that lenders look for debt ratios to be 35% or less.  There is really only a total debt ratio you need to worry about.  Don’t worry about the housing ratio.  It never seems to matter what that ratio is, just the total debt ratio.

I almost constantly can get loans approved with 45-48% debt ratios. 

How to properly calculate debt ratios.

To calculate a debt ratio you basically take your monthly debt payments and divide that number by your household gross income (before taxes).  This will give you your debt ratio.

If you want to see “How much of a mortgage can I qualify for”, you just take your gross pay and multiply it by 45%.  Then subtract out your monthly loans, car, minimum credit card payments, and any other loan payment you have.  (Do not include utilities, car insurance, day care, etc.)  The amount that you are left with will answer your question how much of a mortgage do I qualify for.

Here is an example:

Let say that your household income is $100,000, and each month you have a car payment of $500, a bank loan payment of $100, and 3 credit cards with minimum payments of $15 each for a total of $45/ month on the credit cards.

First you would take the $100,000 yearly income and divide by 12.  This equals $8,333.33/month.

Then add up all the debts 500+100+45=$645.  This is your monthly debt before the proposed house payment.

Then take your monthly income of 8,333.33 x 45% = $3,750 (This is how much all debt can be.)

Finally, take the $3,750(45% of monthly income) – 645 (monthly debt pmts) = $3,150

$3,150 will be how much mortgage you can afford payment wise monthly including insurance and taxes on the property.

Now that we have looked at “How Much Mortgage Can I Qualify For”, in the next post as promised I will talk about “How much mortgage can you afford”.

There is one last step I wanted to mention when you are trying to determine “How Much House Can I Qualify For”.  It is equally important to try and establish “How Much Mortgage Can I Afford”.

How much mortgage can you afford doesn’t have anything to do with debt ratios, or anything like that, it has to do with you personally.  You will know your situation better than a loan officer.  You will know if that car you have is paid off and is on its last leg.  Are you soon going to be having a new $500 car payment and will you still be able to make the mortgage payment with the additional debt?

It could also work the other way too.  Over my career, I have done many loans for people that were pushing their debt ratios, but were fairly certain their income was going to increase.  For example, maybe you are about to graduate from college and know that your pay is going to be going up soon.  Or maybe your small children are about to start school and mom is going back to work.  These situations would be ok to push and stretch your debt ratios since you know that more income will be flowing in soon.

Anyway, I think you get the idea.  I didn’t want to make this a huge post.  I just wanted to make a point to give you something to think about.  It is also something that you won’t find on a “How Much Mortgage Do I Qualify For Calculator”.

I hope that these posts have helped you decide the question “How much mortgage can I qualify for, and also how much mortgage can I afford.  If you have any additional questions, please feel free to give me a call or email me. I will be more than happy to help you out.