Today I’m going to talk about a very popular topic…which is “How much house payment can I qualify for?” You’ll learn the formula that home loan lenders use to figure out what you would likely be approved for as far as your total monthly mortgage payment .You’ll even get a worksheet at the end to help you easily do the math and figure it out yourself.
Lenders allow 43% of gross income minus debt
As a general rule, when it comes to figuring out the maximum house payment you are qualified for lenders will allow about 43% of the gross income of all borrowers minus all the borrowers consumer debt.
I’ll explain that in more detail. What that means is, you would add the gross (before tax) monthly income of all borrowers that are going to be on the loan, then you would subtract any monthly consumer debt to get the total figure you may qualify for. I’ve included a worksheet below this podcast so that you can click on and it will help you do the math and show you the formula visually.
A real life example
Let’s use a real life example. Mary and John want to buy a house. We’re going to use their gross income for the calculations. Gross income means the before tax income, not take home pay. Mary and John each earn $3,500 a month gross income for a total of $7,000.
First we want to figure out what 43% of the 7000 income is. On our calculator we type in $7,000 X 43% and that equals 3010 a month .So, $3010/mo. is 43% of their 7000 monthly income. If John and Mary had no consumer debt whatsoever, they could be approved for a $3,010 a month mortgage payment. But having zero consumer debt is just not a reality for most people.
Let’s say Mary and John have a car payment of $500 a month, $200 a month in student loans and $300 a month in credit card debt for a total of $1,000. As I mentioned earlier, in general, lenders will allow 43% of the gross monthly income of all borrowers minus their consumer debt.
Since we know now that John and Mary earn 7000 a month gross income, that 43% of 7000 is 3010 and they have $1,000 a month in consumer debt we will subtract that 1000/mo. debt from the $3,010 which leaves us with a figure of 2010/mo. which would be what they could be approved for.
To be clear this $2010 is not just including the principal and interest payment on the loan but the TOTAL housing payment which includes principal and interest, property taxes, homeowners insurance and homeowners association fees and monthly mortgage insurance if needed
Important to keep in mind
A few VERY important things to remember…this is a general overview of how lenders look at approving people for home loans. 43% is NOT set in stone. Some people are approved for 40% or less depending on past credit history or other factors. Some can be approved for 50% or more with great credit, and more down payment. The type of loan, credit score and down payment has a lot to do with exactly how much someone can be approved for. So please know that 43% is a general rule that can be higher or lower.
If you’d like me to take a look at your specific situation just click the #2 link below
The correct way to look at the actual consumer debt
Here are a few other things to keep in mind when you’re figuring out your consumer debt. Consumer debts are typically things that show up on your credit report. Consumer debt means things like car payments, the minimum payments required on credit card debt, student loans, installment loans, child support & alimony. Remember to only add up only the minimum required payment on these items. Not any extra that you may pay each month. Consumer debt DOES NOT include things like rent, utilities, cell phones, insurance etc. If you have unpaid non- medical collections or charge offs it gets more complicated and you will definitely want to talk with a lender about how those are figured.
If you’re self-employed the lenders will typically not be using your gross income but your gross income minus deductions and that can be significantly less than your gross income so it is wise to talk with your lender if you’re self employed
My goal here is to just give you an overview of how lenders look at qualifying for home loans. I would advise you reach out to a lender to get specific information about your situation.
I want to help bring you more knowledge and confidence regarding the home loan process.
It doesn’t cost anything to talk so give me a call or shoot me an email….I’m happy to help
Now that you know how to figure out how much a total house payment you may be approved for…if you’d like you can take the next step and discover what the actual price range of home your eligible for…Just click #2 below .
Thanks a lot for tuning in
“Download the “How much house payment can I afford worksheet” below”
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Kurt Nilsen-Mortgage Advisor
Sunrise Mortgage Group
NMLS # 251455
Giving Knowledge & Confidence To Home Buying