Question by Andrew R: How much mortgage payment are they qualified for?
Pete and Pam want to purchase a new home but don’t know how much mortgage they can qualify for. The lender requires total installment loan payments not exceed 32% of gross monthly income. Based on Pete and Pam’s financial data below, illness pill what is the maximum monthly mortgage payment for which they can qualify?
Monthly Gross Income
$ 5, illness 000
Car payment
400
Student loan payment
300
Current rent payment
1,000
Options:
$ 1,700
$ 1,600
$ 900
$ 600
$ 500
Best answer:
Answer by bdancer222
32% of monthly gross income would be $ 1600. But that would really stretch Pete and Pam’s budget. They would be smarter to stay under 25% of their monthly gross income. That way they’d have some wiggle room when all the extra expenses of owning a home hit them.
Know better? Leave your own answer in the comments!
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It doesn’t matter what they qualify for.
Those formulas are bullshit.
What matters is what they can AFFORD.
if they smart , they will get a mortgage
with payments no more than 900 month.
According to the requirement 32% of monthly gross income would be $ 1600. But if this is under 25% of monthly gross income then there is no problem.
It’s 2 1/2 times their salary.
Your question addresses one aspect of qualifying for a mortgage, namely the DTI (debt-to-income ratio). Based on the information you provided, the answer would be $ 900. (Total installment payment allowed would be $ 1600, based on 32%*$ 5000. Take away current installment payments of $ 700 for student loan and car payment and you are left with $ 900).
However, lenders use different DTi ratios. This includes the following monthly payments: Housing Payments (mortgage principal and interest, mortgage insurance if relevant, property tax, property insurance) and Loan payments (installment loans like auto loans, student loans, personal loans and credit card payments. Also court ordered payments would be included).
In general, conventional loans allow for DTI up to 45%. FHA loans (which have easier credit requirements) allow for a total DTI up to 43% and a DTI based on Housing expenses only up to 31%.
DTI is just one factor lenders use to qualify you for a loan. They also look at your credit score, your income and employment stability, and the amount of equity or downpayment you have (your LTV or loan to value).
I recommend that Pete and Pam read the Bills.com article about qualifying for a loan http://www.bills.com/qualify-for-a-mortgage/ and use their mortgage affordability calculator to help determine the maximum loan they can qualify for.