What Is Maximum Monthly Mortgage Payment You Can Afford?

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss what is maximum monthly mortgage payment you can afford versus how much you qualify.  As technological advances such as the train and automobiles allowed Americans to expand out of major cities, homeownership has always been the American dream. Homeownership there is a staple of what America stands for. After World War 2, Americans expanded out of major cities and into the new world of the suburbs. Americans flourished for decades on the backbone of the economy stimulated by the war. As we get closer to modern times, things changed. We learned a lot during the real estate crash of 2008. That is when our federal government once again had to step in and add regulations such as the DODD-FRANK  ACT. As a result, you now must verify the ABILITY TO REPAY your mortgage loan before you can legally close.

How Much Can You Afford Versus Qualify?

One important factor first-time home buyers should take into consideration is the Maximum Monthly Mortgage Payment Affordability Versus Qualified. We will detail what the maximum monthly mortgage payment versus how much you qualify on a home mortgage. We will also touch on how underwriters view special types of income. In the following sections of this blog, we will cover and discuss what the maximum monthly mortgage payment versus how much you qualify on a home mortgage.

Realizing What Is Maximum Monthly Mortgage Payment You Can Afford Versus How Much The Lender Says You Qualify?

Debt to income ratio is a key pillar of your mortgage qualifications. Mortgage Underwriters do not take into account debts that do not report on the borrower’s credit report. Each loan program has different requirements surrounding debt to income. The most aggressive mortgage products for stretching debt to income ratios are FHA and VA mortgages. According to HUD guidelines, the FHA max debt-income ratio is capped at 56.9% (per the automated underwriting system, AUS).

Debt To Income Ratio Does Not Determine What Is Maximum Monthly Mortgage Payment You Can Afford?

VA mortgages do not have a maximum debt-to-income ratio requirement. For VA mortgages, you must pass residual income calculations and underwriter discretion. Just because you can qualify with a ratio such as 56.9% doesn’t mean that is the right mortgage product for you. It is important to stay within your budget

The maximum monthly mortgage payment affordability should seriously be taken into account.

How Do Mortgage Underwriters Calculate Qualified Income?
Mortgage Underwriters Calculate Qualified Income

How Underwriters Calculate Income:

  • Underwriters MUST comply with federal regulations on how income is calculated to buy a home
  • They are looking for stability and justification for the continuance of income
  • This is why they use a two-year average for income
  • Unless your employer pays you with a salary or full-time hourly pay, the underwriter must see a two-year trend to determine your income

For any type of variable income such as part-time income, commission income, bonus income, or working two jobs, the underwriter bust verifies a two-year history and the likelihood that this work structure will continue for three years.

Case Scenario Where Underwriters Analyze Qualified Income

Let’s break that down a little further in the following paragraphs. The two-year trend is very important for variable income. Let’s use a car salesman for our first example:

  • Mark is a car salesman who has been working the same job for 3 years, starting in 2016
  • He has always had a base salary of $24,000 a year
  • In 2017, his total commissions were $39,000
  • In 2018, his total commissions were $33,000
  • Since the underwriter must analyze a two-year trend and his income is decreasing from 2017 to 2018, a 12-month average of 2018 commissions will be factored into his total income

How Mortgage Underwriters Break Down Salary Versus Commission Income

Here is the breakdown;

  • $24,000 salary – $2,000 a month
  • $33,000 in commission over 12 months = $2750 a month

How Qualifying Income Determine By Mortgage Underwriters

TOTAL QUALIFYING INCOME = $4,750

In this example, IF Mark made higher Commissions in 2018 the underwriter would then take it to your average. So, let’s say in 2018, he made a total of $42,000 in commission. His commission income would be calculated like this:

  • $39,000 + $42,000 / 24 months = $3,375

How Do Mortgage Underwriters Determine Declining Income?

How Mortgage Underwriters Calculate Qualified Income

In this next example, we will use a construction worker named Bob. Bob has worked for the same contractor for 10 years. He is an hourly employee who more often than not works overtime. He does have a history of receiving overtime for over two years. So the underwriter can add in the overtime income. Just like commissions above, if there is a decline in overtime over the two-year analysis, then a 12-month average of the most recent year will be used.

How Do Mortgage Mortgage Underwriters Calculate Overtime Income?

However, in this example, Bob had more overtime in 2018 compared to 2017. Example;

  • Paid $29 an hour for the first 40 hours of the week and paid time and a half for hours worked after 40 hours
  • BASE PAY – 40 hours a week * $29 = $1160 a week OR $ 5026.67 ($60,320 a year)

OVERTIME

  • 2017 Overtime total – $24,000
  • 2018 Overtime total – $ 28,000
  • $24,000 + $28,000 = $52,000 /24 = $2,166.67

TOTAL QUALIFYING INCOME = $7,193.33

NOTE – A Year to Date (YTD) for overtime and commission must support the trend used to calculate income. 

Can I Use Second Job Income For Mortgage?

Second Job To Be Used As Qualified Income

Over the years I have had many clients ask if they can get a second job to help qualify for a larger home. The answer is no if you were to get a second part-time job or even a second full-time job, you must show a two-year history of working two jobs. The two-year history makes sense for sustainability and accountability for paying your bills. If you do have a two-year history of working two jobs, then the income from both jobs will be counted in your debt to income ratio.

Understanding Maximum Monthly Mortgage Payment To Avoid Buying Too Much House 

Homeownership comes with a lot of responsibility. Many of us enjoyed THE MONEY PIT movie starring Tom Hanks, but that movie can become reality. Many first-time homeowners learned valuable lessons early in homeownership. There are things such as utilities and maintenance that are not factored into your debt-to-income ratio. This is why the DTI caps exist, to leave a cushion for other bills and items such as groceries. Things will happen that are out of your control while owning a home.

The Importance of Getting a Home Inspection Done For Home Buyers

Recently I had a client purchase a home and within three weeks the air-conditioner and hot water heater both went out. This was unfortunate because the home inspector gave them a four-year life expectancy on the inspection report. It is important to understand that the inspection is just that and is not a guarantee. The client was forced to replace the hot water heater and the air conditioning unit on credit. Increasing their monthly expenses. Part of the reason it is important is not to stretch your debt-to-income ratio as far as you qualify.