As a general rule, most future homeowners can afford to mortgage a property even if it costs between 2 and 2.5 times the gross of their income. Under this particular formula, a person that is earning $100,000 each year can afford a mortgage up to $250,000. However, a borrower should evaluate their finances and how much they are will to pay monthly when making the decision. Knowing the mortgage size and approximately monthly payment that can be handled also helps the borrower narrow down the playing field so that precious time is not wasted in touring homes that are out of the price range.
Debt-To-Income Ratios and Down Payment
There are several ratios that lenders consider when determining how much money a person can borrow for a mortgage. It’s a good idea to know what factors lenders consider when determining how much mortgage that borrower can get. There are three main factors, which are briefly described as follows:
- The percentage of yearly gross income that is dedicated to making the mortgage each month is called the Front-end Ratio (mortgage payment, which are: interest, principal, insurance, and taxes). Generally these items should not exceed 28% of the borrower’s gross income, but some lenders allow the borrower to exceed 30% and some even allow 40%.
- The debt-to-income ratio, which is also called the “Back-End Ratio” measures what percentage of income is required to cover debts (mortgage payment and such debts as child support, car payments, other loans, and credit cards). The debt-to-income ratio should not exceed 36% of the gross income. In some areas that have higher home prices, it is hard to stay within 36% with lenders allowing the debt-to-income ratio to go as high as 45%, which could increase the interest rate.
- Most lenders require a down payment of around 20% of the price of the home. This minimizes the need for property mortgage insurance (PMI) requirements, which increases the mortgage payment.
The down payment also has an impact on the monthly mortgage payment and on the front-end and back-end of the loan. More expensive homes can be purchased with larger down payments.
Just because you can afford a home based on these factors does not mean you should finance the maximum loan amount. Here are a few questions to ask yourself:
- What is your life style? In other words, do you have an active life style that requires a lot of your resources (or money)?
- How long are you going to stay in the home or if you are expected to increase your income can determine if a fixed or variable rate loan is appropriate. A variable rate mortgage would start at a lower rate than a fixed rate mortgage. The downside is the potential of increases in interest rates over time.
Pre-qualification Vs. Pre-approval
Ideally, a potential home buyer would talk to a lender to get either a pre-qualification or a pre-approval letter. These are two different types of letters, which are defined as follows:
- Pre-Qualification Letter are typically less intensive than a pre-approval letter and involves a brief conversation without document support.
- Pre-Approval Letter is much more detailed and requires a review loan requested documents (i.e. financial statements, credit reports, etc.) as well as proof of a down payment.
The Tampa Bay MSA area experienced large growth in residential housing during the residential “boom” period of the early to mid 2000’s. Since the beginning of 2013, the market has shown increases in both pricing and sales figures. These figures continue to show improvement. However, Hillsborough County is becoming more built out with less vacant land available for development. Since most people will not buy homes with cash, I hope this helps you getting your new home with a mortgage and realize the dream of home ownership.
In the Real Estate Market?
You should consider using a realtor. I could save you money especially with new home builders and it does not cost you anything. So why not? Let me save you money!!! If you are interested in buying real estate (new home, existing home, or commercial property), please contact me (Alan Lane with Keller Williams Realty a.t 2119 W Brandon Blvd, Brandon, Florida 33511). As a life long resident of Central Florida, I can help you find the right property for you whether it is in Lakeland or as far south as Sarasota. The Keller Williams offices of ”Suburban Tampa” include the offices in Brandon, Plant City, Fishhawk Ranch, and our newest office in Valrico. My email address is firstname.lastname@example.org, or call me at 813.205.9280. If you are just starting your search, you can search the MLS for real estate opportunities on my website at this link