Qualifications Checklist
This section gives you a better understanding of what information
is used to determine your ability to qualify for a loan.
Using
the calculator in the Affordability section, you can estimate
what lenders may offer. Lenders will review your income, debt,
and savings information to determine how much money they are
willing to lend you towards your home purchase. Lenders will
provide you with an estimate on how much you can qualify to
spend toward the purchase of a home. This estimate is the maximum
amount that the lender is willing to lend you.
Based on your lifestyle and needs, you should
consider how much you are willing to spend on the purchase of
a home. In some cases, the homebuyer is not willing to invest
as much of their income toward a house as they can actually
afford. Below are further details about the kinds of information
used to determine how much you can afford, namely Income, Debt,
and Housing-related expenses.
Income
Your income will be critical in computing how much you can afford
to pay (using current lending guidelines) for housing related
expenses. Your income information is included in the PITI (Principal,
Interest, Taxes, and Insurance) and debt ratio (PITI and debt)
calculations. Your ability to meet the PITI, or front-end ratio,
and the PITIO ratio, or debt ratio, can have an impact on a
lender's decision to offer you a loan.
Different loan programs have their own rules
regarding the percentage of income that can be applied toward
monthly house payments. For example, government loan programs
such as FHA and VA have ratios that allow you to apply a higher
percentage of your income toward the loan. While conventional
loan front-end ratios generally run around 28%, FHA allows you
to apply 29% and VA allows you to apply 41%.
Basically, this means that your monthly loan
payment should be no more the 28%, 29%, or 41% of total monthly
income, depending on the loan program.
Debt
A lender carefully considers your debt information when it assesses
your ability to repay a loan. Your debt information is included
in the PITIO, or debt ratio calculation. Loan programs have
different rules regarding the percentage of income that can
apply towards long-term debt. Your ability to meet the ratio
requirements can impact a lender's decision to offer you a loan.
Government loan programs such as FHA and VA allow you to apply
a higher percentage of your debt requirements towards the loan.
While conventional loan debt ratios generally run around 36%,
FHA and VA allow you to apply 41%. Basically, this means that
your long-term monthly debt payment plus your monthly loan payment
can equal no more than 36% or 41% of total monthly income, depending
on the loan program.
Housing-related expenses
Housing-related expenses are another category lenders consider.
These expenses often depend on the location and type of home.
This will influence the amount of the loan for which you can
qualify and may be one of the most critical factors in your
decision to buy a home. You should consider how housing-related
expenses could impact your budget. The purchase of a home may
increase your monthly expenses and reduce the amount of money
you have remaining to support your lifestyle.
YPTH's Affordability calculator provides estimates
on typical home expenses that include:
- Property tax - This expense is dependent on
the location of the home. Different counties and states have
different property tax requirements. As a homebuyer, you would
be wise to consider how this additional expense will impact
your total monthly expenses.
- Maintenance costs - This expense includes
anything from washers in the faucets to a new roof or heating
system and varies by geographic location, size, and age of
home.
- Utility costs - This expense includes items
such as electric, gas, water, and heating and air conditioning
and varies by geographic location, size, season, and age of
home. The type of construction (i.e. gas, electric) may also
be a factor in your utility cost estimates.
- Mortgage insurance (if applicable) - This
expense can vary by mortgage insurance company, lender, loan
product, and loan-to-value percentage of the loan.
- Other Costs - These expenses vary depending
on the type of home and geographic location.
- These costs can include:
- Homeowner association fees
- Flood insurance
- Other required property insurance
- Condominium assessment fees and
- Other condominium escrow items.
