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What must be considered when applying for a loan?
Income vs. Debt
When making this determination, lenders consider the income of all parties who will be owners of the property. Be prepared to provide an accounting of all sources of income such as your annual tax return. Lenders are interested mainly in your present monthly payments because they want to be sure you can handle the mortgage payment you'll be applying for.
Down Payment Requirements
Mortgage plans have various down payment requirements and they can range from 0% down on a VA (Veterans Administration) loan to between 3 and 5% down on a FHA (Federal Housing Administration) loans to 20% down, the traditional amount for a conventional loan. In addition, special state programs for first-time home buyers may set different sums, which are usually lower than conventional financing.
Private Mortgage Insurance
If you put less than 20% down on most loans, you'll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This adds approximately an extra half a percent onto the loan. FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).
How Much House Can You Afford?
The amount of loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe" amount for your mortgage payments. A fairly standard ratio is 28/33. Certain mortgage plans sometimes use more liberal ratios - for example, the FHA currently uses 29/41. Here's how it works: With a 28/33 ratio, you'd be allowed to spend up to 28% of your gross monthly income for mortgage payments. The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 33% of your gross monthly income. To calculate exactly how much you may borrow, you also need an estimate of current interest rates. As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and Homeowner Association fees (if applicable) you might need to pay, which are considered part of your monthly expense.
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