You’ve gotten preapproved for a mortgage, and you’re extremely excited about the budget you’ve been provided with. It’s way more than you expected! If you’re staggered by how big a home mortgage you’re allowed to carry, maybe it’s time to step back a minute and reevaluate.
Lenders aren’t omniscient!
Remember, lenders and underwriters make decisions about lending based on what they know and can verify regarding your finances. This means they know about what you tell them, and what shows on your credit report. Other things in your life may impact your ability to make high mortgage payments.
- If you are paying back a massive personal loan to your in-laws that doesn’t show on your credit report, your available cash could be much lower each month than the lender believes.
- Likewise, if you have an expensive hobby, you could be spending a lot more on personal expenses than is immediately visible on a preapproval application.
When a lender calculates how much house you can afford, they review pertinent items such as:
- Household income
- Monthly debts
- Available cash for a down payment
- Savings in the bank or other assets
- Credit history
Your debt-to-income (DTI) ratio is important. An “ideal” DTI would be that your housing expenses (mortgage, insurance, and property taxes) are 28% or less of your monthly income, and once you account for credit card debt or auto/student loans, the maximum DTI is still around 36%.
For many people, a DTI that low is out of reach, but don’t stress over it yet. Lenders like to see a low DTI ratio, but most will work with you even if you have a higher ratio. Different loan programs have specific limits, including:
FHA loans may require a DTI of around 43%, or may go all the way up past 55%. Your lender may well have discretion to work with you on your DTI if there is an end in sight for one of your larger monthly expenses or if you have great credit or a higher than normal down payment.
A conforming loan is for less than a maximum dollar limit set for federal loans and meets criteria from Fannie Mae or Freddie Mac. A conforming loan may be approved even if you have a DTI as high as 50% (recently raised from a ceiling of 45%).
A jumbo loan or non-conforming loan is usually for an amount larger than allowed for a conforming loan. Usually, you’ll need better credit and a bigger down payment in addition to a lower DTI (typically closer to the “ideal” 36% maximum listed above) although most lenders will have some wiggle room. To get the best rates on a jumbo loan you will often find lower DTI requirements.
The DTI “limit” for a VA loan is usually set at 41%, but as with every loan, there may be room for your lender to make a little accommodation. If you are able to make a substantial down payment or have great credit, you may be able to carry more monthly debt and still get approved.
Remember that the monthly income is calculated off your gross. You have to subtract your withheld taxes, any retirement contributions, and other deductions from your payroll to get to a real number before calculating your real expenses.
Then you have to account for your utilities, groceries, subscriptions, and other money that goes out of your accounts monthly. Do your kids need childcare? Are you sending them to a private school? What about braces and ballet lessons or hockey skates? When you get right down to it, you probably don’t have as much free cash every month as it appears on the surface.
You also need to think about what could happen if there was an emergency that kept you from earning income for a few months. This could be a car accident, a family member’s illness, or even a global pandemic. You should have at least 3 months worth of expenses socked away, and 6 months would be even better.
If you are spending all of your available income on housing, you’re tying up all of your wealth in a piece of property that you need to live in – making it difficult to liquidate in an emergency. A small mortgage can let you also put money away in a retirement account. This helps you save against your eventual retirement, and you can always borrow against your home equity if you need to down the road.
Your Sammamish Mortgage Loan Officer Can Help You Determine How Much House you Can Afford
We want you to get your dream house – and to live in it for a long time. That’s why our loan officers are focused on getting you the best loan possible, not just the biggest. Get preapproved today!
Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.
Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.