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How do we determine how much you qualify for?
You may already have a payment range you’ve determined that would work for you. But when people think about getting pre-approved for a maximum loan amount, we have our own system for determining what we think would work for you.
When asking about a maximum amount you can borrow, what we really look at is the maximum we think you could reasonably be expected to pay per month for housing. When we calculate those payments, we count the following four things:
- Principal and Interest, including both the funds required to repay the loan as well as interest due on the outstanding loan amount.
- Property taxes
- Insurance premiums
- Condo or Homeowners Association fees, if applicable.
We calculate your debt to income ratio (DTI). This refers to the monthly ratio of your debt payments to your gross monthly income. The maximum DTI differs by loan programs, but lets go ahead and assume with the following example that the maximum is 45%.
Let’s say your combined gross (gross means before taxes are taken out) monthly income is $5,000. The allowed total debt would be $2250 (45% of $5000). If you have car loans and student loans or any other debt, those payments would be taken out of that allowed total of $2250. Let’s say you have a car loan for $400 and student loan payments at $100 a month. Therefore, $2250-$400-$100=$1750 in a maximum total housing payment.
Want help calculating your debt to income ratio? Reach me at 240-479-7658.
These calculations get much more complicated when you have different types of income, expenses, or assets.