April 16, 2010, Newsletter Issue #214: How to Qualify for a Home Loan

Tip of the Week

Qualifying for a mortgage is one of the most important components of getting the mortgage you want. If you qualify, the rest is relatively easy once you know how to do it. Before you find the “home of your dreams” you should determine what size mortgage you qualify for. Here’s how to do it:
Determine your household gross monthly income . Do not use your “net” income (gross minus taxes, insurance deductions, or other reductions). Use your gross salary or monthly total wages before taxes and other deductions. Do not include overtime or special extra income unless you can prove it is regular and consistent. Calculate your monthly debt obligations. Do not factor in your utility expenses (telephone, electricity, heat, etc.). Just consider your regular monthly debts, including auto loan payments, credit card monthly payments, student loan payments, and other installment loans you have. Divide your monthly debt obligations by your household gross income. The result will be a percentage that indicates how much of your gross monthly income you spend on outstanding debts before you add a mortgage payment into the mix. Use one of the many mortgage calculators available online to calculate a potential mortgage amount and monthly payment. If you do not have access to the Internet, visit your local library to connect or get information on how to calculate a mortgage amount and payment. Should you already have a trusted mortgage broker or lender, talk with them to determine the maximum mortgage amount you qualify for and what that monthly payment might be at current interest rates. Your projected new mortgage payment, including prospective monthly real estate taxes and homeowner’s insurance, should not exceed 25-35% of your gross monthly income. Then add a projected new mortgage payment and your current monthly obligations. Divide that amount by your regular household gross monthly income. The resulting percentage should be between 36-48% to safely qualify for the mortgage you need. Once you have completed this process, you will have mastered a key ingredient in the mortgage process. You will know the general range of properties that will be available to you and what your prospective budget will look like after you close on your new home.

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