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When purchasing a home, people often turn to a mortgage company or financial lender to obtain a mortgage in order to buy the house. Although a mortgage is often thought of simply as a loan that is taken out so that you can buy a home, it is can also be used for purchasing a ship, land or other various properties.
One of the first things that need to be considered, when obtaining a mortgage, is your debt to income ratio. Simply stated, this is the percentage of your gross monthly income that is used for the purpose of paying off your monthly debts. There are two different parts of a debt to income ratio, the front and the back.
The front ratio is the percentage used for debts such as housing costs, insurances, taxes, interest and whenever applicable, homeowner’s insurance. On the other hand, the back ratio includes the above costs, as well as other debts, such as credit card debt, car payments and other similar expenses. Life insurance and auto insurance are not considered to be a debt.
A general guideline used for debt to income ratio is 33/38. Your housing cost can consume thirty-three percent of your overall monthly income. If you then add in your other debts, it should not be more than thirty-eight percent of your monthly income. These guidelines are often very flexible and a lot of times depend on your credit.
For some, proving their monthly income is quite easy. If you have a straight forward income, whether salary or hourly, without any bonuses, you can show your pay stub as proof. However, for other people, the process is a bit more complicated. The process becomes complicated with people who earn bonuses, overtime and/or commissions.
One simple way to get a pretty good estimate of your monthly income is take your last two W2 forms, add them together and divide the
total by twenty four. Generally, this will give you a close estimate that you can go by.
In order to calculate your maximum monthly mortgage payment, multiply your monthly income by the back ratio (generally 38%). This calculation will give you the maximum amount a lender will allow you to spend each month on your housing costs as well as your consumer debt.
After you have your overall maximum that lenders will allow you to spend each month, you must then calculate your monthly expenses. Keep in mind that your utilities and your auto insurance are not to be included in this figure, just your creditors. Once you have a grand total of your monthly debt, deduct that figure from the total your lender will allow you to spend.
Then next step in the overall process requires you do a little estimating. If you are able to come up with a general idea of how much house you can qualify for, then you can determine the approximate amount of homeowner’s insurance and annual property taxes.
After you have all of these figures, you can then go to a mortgage calculator. By plugging in the above numbers, along with the current interest rate, you will get your maximum mortgage amount. You can then add in your down payment and find out the maximum purchase price.
Once you have a basis to go on, you can begin your home search. Lender are available to work with you and help you to qualify for higher mortgages if need be. However, it is important that you keep your monthly mortgage payment at a dollar amount that is comfortable for you. You don’t want to overextend yourself. It is better to underestimate, than to wind up with a loan you cannot pay for. With a few simple calculations, you can easily determine what you qualify for. Then, just pick up the phone and call a lender near you.
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