How Much Can I Borrow? – Check Your Ratios
There is not a “cut and dry” answer to that question. With traditional financing, the general rule of thumb has been to follow the 28/36 rule. This means that your house payment including taxes, insurance, and any homeowner’s dues should not be more than 28% of your gross monthly pay (this is called your “front end ratio”). Likewise, all of your monthly liabilities that appear on your credit report should not exceed 36% of your gross monthly pay (this is referred to as your “back end ratio”).
Front End Ratio = estimate your monthly mortgage payment /gross monthly pay
Back End Ratio = estimate all of your monthly payments listed on your credit report / gross monthly pay.
Your ratios are only one variable which determine how much you can borrow. What you really need to ask yourself is “how much can I afford to pay each month?” Start there and then call a one of the mortgage lenders and brokers found in mortgage rate search survey found on this site and find out exactly what programs and rates exist for your particular situation.
Mortgage Pre-qualifications vs. Mortgage Pre-approvals
In a today’s real estate market, sellers are typically looking for some evidence that you are qualified to buy before they accept your offer. Without a mortgage pre-qualification or home loan pre-approval letter, you may find yourself at a competitive disadvantage if there are competing offers and the other buyers have shown the goodwill of seeking out financing ahead of time.
What is the difference between the two terms?
A mortgage pre-qualification typically implies that you have spoken with a mortgage banker or lender and, based upon the information that you have provided, are qualified to borrow ”X”amount of money. A mortgage pre-qualification letter is a good start but often comes with some vague language and a laundry list of ”outs” that may not build confidence in the seller’s or real estate agent’s mind. A mortgage pre-approval takes the process to a new level. Mortgage pre-approval letters may indicate that the borrower has met with a banker or lender and that the borrower has been approved for a mortgage with a very limited list of pending items (typically the appraisal and final underwriting review need to be completed). Some homeowners may not understand the difference but, believe us, most real estate agents do and they have their customers’ ears. We suggest taking the time and to obtain a home loan pre-approval.