How Much House Can I Afford To Buy Versus Qualify

This Article Is About How Much House Can I Afford To Buy Versus Qualify 

First time home buyers, as well as seasoned home buyers, need to consider ” How much house can I afford to buy?” when buying a home:

  • Mortgage lenders will qualify borrowers on the maximum housing budget that buyers can afford
  • However, just because the lender qualifies for a loan based on the down payment, income, and credit history does not mean home buyers can afford a new home purchase
  • Always ask How Much House Can I Afford To Buy
  • Lenders do not take into account personal expenses that do not report on the credit report
  • Homeowners will still want to maintain the lifestyle of living like they were as renters
  • Upgrading to a bigger more expensive home will add to monthly expenses
  • Just because a lender qualifies and is willing to lend the funds to purchase home borrowers can afford does not mean that How Much House Can I Afford To Buy

How Mortgage Underwriters Calculate DTI

How Much House Can I Afford To Buy is not the job of the lender. This is the buyer’s responsibility:

  • Mortgage Underwriters will not take into account how much borrowers personal monthly budget 
  • Liabilities and debts that do not report on the credit report are not taken into account such as the following expenses:
    • utility bills
    • private school bills
    • helping out elderly payments
    • supporting kids for college tuition
    • vacations
    • pet care
    • hobbies
    • other personal expenses are not considered by mortgage lenders
  • These added expenses are expenses that new homeowners need to seriously consider and decide whether a particular home they want to purchase is realistically affordable and that it will not make a big dent in their lifestyle
  • We will cover the question of how mortgage lenders calculate on how much home you can afford as well as help answer the question of “HOW MUCH HOME CAN I AFFORD TO BUY” in this blog

Hopefully, this article will be helpful in helping to decide in not buying too much house where it affects the new homeowners’ lifestyle.

How Mortgage Underwriters Analyze How Much Borrowers Qualify For

Mortgage Underwriters will not take into account how much borrowers personal monthly budget :

Liabilities and debts that do not report on the credit report are not taken into account such as the following expenses:

  • utility bills
  • private school bills
  • helping out elderly payments
  • supporting kids for college tuition
  • vacations
  • pet care
  • hobbies
  • other personal expenses are not considered by mortgage lenders
  •  

These added expenses are expenses that new homeowners need to seriously consider and decide whether a particular home they want to purchase is realistically affordable and that it will not make a big dent in their lifestyle:

  • We will cover the question of how mortgage lenders calculate on how much home you can afford as well as help answer the question of “HOW MUCH HOME CAN I AFFORD TO BUY” in this blog

Hopefully, this article will be helpful in helping to decide in not buying too much house where it affects the new homeowners’ lifestyle.

How Lenders Qualify Versus How Much House Can I Afford To Buy: Debt To Income Ratio Explained!

How much home a new homeowner can afford is not based on how expensive the value of the home purchase is.

  • It is how much monthly housing payment that consists of principal, interest, taxes, and insurance based on the balance of the loan is as well as other monthly expenses
  • Homeowner association dues, as well as mortgage insurance premiums, are also added in calculating both front end debt to income ratios as well as back end debt to income ratios
  • Front end debt to income and back end debt to income ratios are calculated by underwriters
  • Underwriters calculate front end debt to income ratios by taking the sum of all of the minimum housing monthly payment which consists of PITI
  • PITI is the principal, interest, taxes, interest, homeowners association dues, and mortgage insurance premium and dividing it by gross monthly income
  • For example, if borrower make $3,000 gross per month and minimum housing payment is $1,000, then front end debt to income ratios is 33%
  • The maximum front end housing ratios allowed for FHA is 46.9% to get an approve/eligible per Automated Underwriting System Findings (AUS)
  • There is no front end debt to income ratio requirement for conventional loan programs
  • However, the maximum debt to income ratios allowed per conventional mortgage guidelines is 50% in order to be able to get an approve eligible per DU or LP FINDINGS which is the Automated Underwriting System

Just because the maximum front end debt to income ratios are capped at 46.9%, that does not mean all mortgage lenders will allow you to have the 46.9% debt to income ratios on FHA Loans.

What Are Lender Overlays

Lender overlays are mortgage guidelines above and beyond those of agency guidelines:

  • Many lenders have something called mortgage overlays which is their own added mortgage guideline on top of the mandatory federal mortgage lending guidelines
  • For example, if borrowers front end ratio is at 46.9% and the borrower goes to MORTGAGE LENDER A, MORTGAGE LENDER A may impose their own front end debt to income ratio cap at no greater than 31%
  • This is called an overlay on debt to income ratios by the individual lender

In cases like these, borrowers may have to choose a lender with no lender overlays on front end debt to income ratios and just goes off the automated findings generated by the Automated Underwriting System, also known as AUS.

Back End Debt To Income Ratio

Back End Debt To Income Ratio

The second debt to income ratio component that mortgage lenders consider in calculating on how much home a home buyer can afford is the back end debt to income ratios.

  • The back end debt to income ratios takes into consideration the sum of the housing payments, as well as borrowers all other minimum monthly payments divided by the borrowers month gross income

All monthly debt that are taken into consideration when underwriters are calculating back end debt to income ratios are the following:

  • minimum auto payments
  • minimum credit card payments
  • minimum student loan monthly payments
  • minimum monthly child support payments
  • minimum monthly alimony payments
  • all other minimum monthly payments that is reflected on the mortgage loan borrower’s credit report

Case Scenario And Example Of Debt To Income Ratio Calculations

Here is how debt to income ratios are calculated:

Let’s take a case example: 

  • Say borrower proposed the monthly minimum payment of his new home is $1,000.00

They also have the following:

  • $200.00 monthly minimum car payment
  • $50.00 minimum Capital One Credit Card minimum payment
  • $100.00 minimum student loan payment
  • $200.00 minimum child support payment
    •  

Adding the sum of borrower’s other payments, the monthly expenses borrower is obligated to pay each month is $550.00 per month:

  • Adding housing payment of $1,000.00 which includes the principal, interest, taxes, insurance, mortgage insurance, and homeowners association fees to other monthly minimum payments of $550.00 yields the total sum of $1,550.00 per month
  • Say borrower has a $3,000 monthly gross income
  • The back end debt to income ratio is calculated by dividing the total expenses of $1,550.00 by gross monthly income of $3,000.00 which yields a back end debt to income ratio of 52%

Automated Approval Via Automated Underwriting System

To get an approve eligible per FANNIE MAE and/or FREDDIE MAC AUTOMATED UNDERWRITING SYSTEM, AUS, for FHA, the maximum back end debt to income ratio that is allowed is 56.9% for borrowers with credit scores of 620 or higher.

  • Credit scores lower than 620, the back end debt to income ratio is lowered to 43%
  • Again, as with front end debt to income ratio caps, many lenders do have their own internal mortgage lender overlays on back end debt to income ratio requirements
  • Many banks and credit unions do cap back end debt to income ratios to 45% DTI when AUS will get automated underwriting system approval with a back end DTI of 56.9%
  • Borrowers with mortgage denial due to high debt to income ratios contact us at Gustan Cho Associates where we have no lender overlays on government and conventional loans

Lenders no mortgage lender overlays and will just go off the automated findings per DU or LP FINDINGS, which is Fannie Mae’s or Freddie Mac’s Automated Underwriting System automated approval.

Front End And Back End Debt To Income Ratio

So on this particular scenario, the maximum loan amount borrower who is making a gross income of $3,000.00 per month will qualify is the following:

FRONT END DEBT TO INCOME RATIO REQUIREMENT IS CAPPED AT 46.9%:

  • 46.9% of the borrower’s $3,000.00 gross monthly income is $1,407.00

BACK END DEBT TO INCOME RATIO REQUIREMENT IS CAPPED AT 56.9%: 

  • 56.9% of the borrower’s $3,000.00 gross monthly income is $1,707.00

The lender will deem the above case study scenario of the above borrower as being able to afford the above type of payments.

How Much House Can I Afford To Buy Versus Qualify: Borrowers Need To Understand Underwriters Do Not Take Personal Debts When Calculating DTI

How Much House Can I Afford To Buy Versus Qualify

The lender did not take into consideration the mortgage loan borrower’s private monthly expenses such as the following:

  • utility payments
  • auto insurance payments
  • private education payments
  • summer camps
  • maintenance expenses
  • other expenses that are not reported on the borrower’s credit report

The question of how much house can I afford needs to be asked and answered by the home buyer.

How Much House Can I Afford To Buy Versus Qualify: Homeowner Versus Renter

How Much House Can I Afford To Buy should always be considered when house shopping. There are many more advantages of being a homeowner than being a renter. However, with the many advantages comes to the disadvantages as well.  Renters do not have to worry about maintenance expenses. However,  being a homeowner comes to the responsibilities of maintenance such as mowing your lawn, trimming trees and shrubs, and needing to repair or replace appliances when they break down and fixing plumbing, electric, and HVAC when they break down.  Some of these repairs can be quite costly and it is suggested that all homeowners have reserves.  Those who are barely getting by and all of a sudden furnace breaks down in the middle of a sub-zero temperature winter and need a new furnace, where is the money going to come from?  Homeowners should set aside a certain budget towards reserves in the event of unexpected expenses.

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