How much can I afford?
When banks decide how much to lend there are 3 main factors to realize.
1- Income: Loan underwriters treat this as ability to repay the loan. Banks use a simple formula called Debt-to-Income Ratio (DTI), essentially, is the ratio of debt to income represented as lower dti lower percentage of your total net income is allowed to be spent on housing. Housing expenses include mortgage payments, property taxes, and homeowners insurance. DTI traditionally is between 30 and 50 meaning between 30 and 50 percent of your net income can be used for housing expenses.
2- Down Payment: Like any other large purchases the buyer needs to put some money down to make the deal work. The smallest down payment is an FHA loan which is about 3.5 percent down. There is no limit to how much you put down. 100% down is considered an all cash offer. Often times smaller down payment loans are subject to private mortgage insurance (PMI).
3-Credit worthiness: Underwriters check credit history and as expected FICO score plays a large part in your loan.
Please Note: There is a lot more to loan underwriting than these 3 main points. This is a fairly simple overview of loan underwriting process. For a more thorough discussion contact us or call your local loan officer.