When you visit your lender to get a mortgage for your home, they will tell you the maximum amount that you are allowed to borrow. But how do they reach this total and what factors do they take into consideration?
How do they determine that one borrower can take on a bigger mortgage than the next? This decision is made by mortgage companies by considering a wide range of factors, including your credit information, your salary and much more.
Here Are Some Of The Common Ways That Lenders Determine How Much You Can Borrow:
1. Percentage Of Gross Monthly Income
Many lenders follow the rule that your monthly mortgage payment should never exceed 28% of your gross monthly income.
This will ensure that you are not stretched too far with your mortgage payments and you will be more likely to be able to pay them off. Remember, your gross monthly income is the total amount of money that you have been paid, before deductions from social security, taxes, savings plans, child support, etc.
2. Debt To Income Ratio
Another formula that mortgage lenders use is the “Debt to Income” ratio, which refers to the percentage of your gross monthly income that is taken up by debts. This takes into account any other debts, such as credit cards and loans. Many lenders say that the total of your debts shouldn’t exceed 36% of your gross monthly income.
The lender will look at all of the different types of debt you have and how well you have paid your bills over the years. By using one of these two formulas, your mortgage lender calculates the size of a mortgage that you can afford.
Of course, there are many other factors that need to be considered, such as the term length of the loan, the size of your down payment and the interest rate.
Remember that when factoring in your income, you usually have to have a stable job for at least two years in a row to be able to count your income. If you want to increase your chances, you could consider paying down your debts or buying with a co-borrower, which will improve your debt to income ratio.
For more info about mortgages and your home, contact your mortgage professional.
Last week’s economic news included construction spending and the CoreLogic Home Price Index for January. Reports for February included ADP Employment, Non-Farm Payrolls and national unemployment data.
The Federal Reserve’s Beige Book report and weekly reports on mortgage rates and new unemployment claims rounded out the week’s economic news.
Highlights for last week include:
Consumer spending gained 0.40 percent for January. The expected reading was 0.20 percent and the reading for December was flat.
The Commerce Department reported that increased spending was less an indicator of consumer discretionary spending than an indicator of high utility costs caused by severe winter weather.
Construction spending ticked upward in January with gain of 0.10 percent as compared to expectations of -0.40 percent and the prior month’s reading of 0.10 percent.
January’s reading translates to a seasonally adjusted annual figure of $943.1 billion.
Federal Reserve: Winter Weather Obscures Accurate Economic Outlook
According to the Fed’s Beige Book report, much of the U.S. economy was impacted by severe winter weather. The report is based on anecdotal information provided by business contacts and industry leaders throughout the 12 regions of the U.S. Federal Reserve System.
Eight regions reported slow economic growth. Janet Yellen, chairwoman of the Fed, noted that winter weather was not expected to alter the Fed’s plan to continue reducing its asset purchases under its quantitative easing program. She also said that it may be months before accurate economic readings can be obtained in the aftermath of winter weather conditions.
Freddie Mac’s Primary Mortgage Market Survey brought good news on Thursday as mortgage rates fell across the board and discount points were also lower in most cases.
Average mortgage rates were down nine basis points for a 30-year fixed rate mortgage at 4.28 percent. The average rate for a 15-year fixed rate mortgage was 3.32 percent, a decrease of seven basis points.
The rate for a 5/1 adjustable rate mortgage was 3.03 percent, down by two basis points from the prior week. Discount points were unchanged for 30-year fixed rate mortgages at 0.70 percent, but dropped to 0.50 percent for 15-year fixed rate mortgages and 0.40 percent for 5/1 adjustable rate mortgages.
Employment Sector: Surprise Results
The ADP payroll report showed a reading of 139,000 jobs added in February as compared to the prior month’s 127,000 jobs. ADP tracks private sector jobs. The BLS released its Non-Farm Payrolls report for February, which also surpassed expectations.
175,000 jobs were added against expectations of 140,000 jobs added and January’s reading of 129,000 jobs added. The national unemployment rate rose to 6.70 percent against an expected drop to 6.50 percent from January’s reading of 6.60 percent. Once again, foul weather was seen as a major influence.
What‘s Ahead This Week
This week’s economic news schedule is relatively light with no releases set for today.
Mortgage rates will be released by Freddie Mac on Thursday, along with weekly jobless claims. Retail sales and the University of Michigan consumer sentiment index round out next week’s schedule.
Getting a home loan can be a challenging process, and a finicky one. Qualifying can be challenging and once a buyer gets approved, it can be surprisingly easy to derail the process. Here are some mistakes to be avoided:
Not Pre-Checking Credit
Once a borrower makes his application for a mortgage, his fate is largely sealed. One way to increase the chance of qualifying for a home loan is for a borrower to check his credit before applying. That way, he can address any issues before they become problems for the lender.
Lenders judge borrowers on their ability to repay the loan. While a borrower’s credit rating is a good indicator of past performance, his current job and income provides some assurances that he can make his payments.
Changing jobs or losing a job interrupts the income, and can make a lender decide not to lend to that borrower.
Taking On New Debt
New debt can derail a mortgage in two ways. First, adding debt can lower credit scores from the inquiry that comes as well as worry lenders. Second, new debt increases monthly payments, which lower the amount that a borrower can take out on a home loan due to the limitations imposed by the lender’s debt to income ratio.
Fudging The Numbers
Some borrowers might be tempted to tweak some of the numbers on their mortgage applications to make them more attractive to the lender, but lying on a mortgage application is a very bad idea.
First, lenders investigate what gets entered and they’re likely to catch it. Second, it is also fraud and could leave the borrower subject to prosecution.
In general, people considering a home loan should remember the Hippocratic Oath that doctors take. Its message — do no harm — is a good rule of thumb for applying for a mortgage.
Applicants that keep their financial status the same throughout the process without making any changes are more likely to emerge at the end with their new home and their original loan.
Two major indicators of home price trends showed a slowing momentum for home prices in December. The S&P Case Shiller 10 and 20 city indices reported that of 20 cities tracked, home prices were lower in December than for November.
Case-Shiller’s seasonally adjusted month-to month reading showed that home prices rose by 0.8 percent as compared to 0.90 percent in November.
David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said that “Gains are slowing from month-to-month and the strongest part of home price recovery may be over.” He also noted that seasonally adjusted data was showing a loss of momentum for home prices.
December home prices posted a year-over-year gain of 13.40 percent, down from November’s year-over-year reading of 13.70 percent. December’s reading reflected the highest year-over-year increase in home prices since 2005.
Analysts note that a slower pace of increasing home prices may allow more buyers to enter the market, and may also encourage more buyers to list their properties for sale.
This would increase inventories of available homes and relieve pent-up demand for homes. Although home price growth is cooling off, average home prices remain 20 percent below their pre-recession peak in 2006.
Home Prices Face Challenges In 2014
Another factor in slower growth of home prices is regional differences in the rate of economic recovery. Cities including Dallas, Texas and Denver, Colorado recently set records for escalating home prices.
Five states including Florida and Michigan accounted for almost half of foreclosures completed during 2013. Slow job growth and poor winter weather were also blamed for slower gains in home prices.
New mortgage rules and relatively strict mortgage lending standards may continue to dampen housing markets, but there is some good news as some lenders are easing credit standards.
FHFA: Home Prices Higher For 10th Consecutive Quarter
The Federal Housing Finance Administration reported similar trends in December home price data for properties either financed or owned by Fannie Mae or Freddie Mac. Home prices rose by a seasonally adjusted rate of 0.80 percent in December as compared to November’s reading.
Home prices were 7.70 percent higher for the fourth quarter of 2013 than for the same period in 2012. Adjusted for inflation, this reading indicates an approximate year-over-year increase of 7 percent.
FHFA reported higher readings for 38 states in its fourth quarter 2013 Home Price Index, as compared with 48 states in in the third quarter of 2013. In order of home price appreciation, the top five states with highest growth in home prices were Nevada, California, Arizona, Oregon and Florida.
These calculations were seasonally adjusted and based on home purchases only.