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Loan
Prequalification
It
is no good finding your dream house if it stretches your budget beyond the
breaking point or if you cannot get a large enough mortgage to finance
it.
Avoid that kind of disappointment with prequalification, a procedure
which allows you to find out - even before you start house hunting - in what
price range you qualify to buy. At many mortgage offices, a sales associate or
loan officer can prequalify you, based on your answers to certain questions as
to income, size of planned down payment and debt. Final mortgage approval is, of
course, subject to verification of those answers.
Simple Prequalification
Calculator
To determine the amount of mortage you would qualify for enter
your Gross Income and the Interest Rate of the 30 year term loan.
How Calculations are done?
Gross Annual Income________________ = A
Divide
A by 12 to
determine ---Gross Monthly Income
Gross Monthly Income_______________ =
B
Multiply B by .28 to determine
----Monthly Allowable Housing Expense
Monthly Allowable Housing
Expense ___________________ = C
(This figure includes
estimated principal, interest, taxes and insurance - also known as
PITI)
Multiply C by .85 to determine ----Monthly Principal and Interest
Monthly Principal and Interest _______________________ =
D
Now take your calculations a
step further by estimating the mortgage amount and affordable price range for
which you could qualify:
Divide D (above) by the interest rate factor (see Monthly
Payments Chart); and multiply that by $1,000 to determine -----Estimated Mortgage
Amount
Estimated Mortgage Amount __________________ =
E
Divide
E by .80 to determine ----Affordable Price Range
Affordable Price Range
______________ .
Calculating Monthly Payments
As
you shop for your new home, it is easy to calculate what your monthly mortgage
payment will be. This easy-to use chart gives you the monthly repayment of your
mortgage loan - the principal and interest payment. This payment is in direct
proportion to (1) the size of your mortgage and (2) the interest rate charged on
that mortage. These Figures are based on the 30 year term, which is the most
popular with home buyers.
Remember, these are estimated amounts of
principal and interest only. Your actual monthly payment will include additional
charges for taxes, property insurance, and such.
Monthly Cost per
$1000 Loan
| %
Rate 30 year term | Interest Rate Factor |
|---|
| 4.00 | 4.77 | | 4.25 | 4.92 | | 4.50 |
5.07 | | 4.75 | 5.22 | | 5.00 | 5.37 | | 5.25 | 5.52 | | 5.50 | 5.68 | | 5.75 | 5.84 | | 6.00 |
6.00 | | 6.25 | 6.16 | | 6.50 | 6.33 | | 6.75 | 6.49 | | 7.00 | 6.66 | | 7.25 | 6.83 | | 7.50 |
7.00 | | 7.75 | 7.17 | | 8.00 | 7.34 | | 8.25 | 7.52 | | 8.50 | 7.69 | | 8.75 | 7.87 | | 9.00 |
8.05 | | 9.25 | 8.23 | | 9.50 | 8.41 | | 9.75 | 8.60 | | 10.00 | 8.78 | | 10.25 | 8.97 | | 10.50
| 9.15 |
Mortgage Guidelines
Generally,
mortgage lenders have a guideline which says that a home buyer should not pay
more than 28 percent of gross income for their monthly PITI payments. As
explained in the preceding equation, PITI stands for principal and interest or
the amount borrowed, along with the expense for property taxes and home owner’s
insurance for each month. An additional guideline is that a home buyer should
not pay more than 36 percent for both PITI and recurring month debt combined (
car payments, credit card installments, etc.). Of course, the ratios above are
only guidelines, and can vary based on the size of your down payment and which
loan program you choose.
To determine if your proposed PITI (the “C”
figure in the preceding equation) fits these guidelines, do the following
calculations:
(C)_______________ = ________%
(B)
Your
answer above should be 28 percent or less in order to meet the first
guideline.
Before you can look at the second guideline, make a quick
calculation of your long-term debts (obligations of 10 months or more). Transfer
that figure into the following equation:
____________ + ________________=
________________
Long-term PITI Total Monthly
debts (Figure C)
debts (F)
Then divide F by
B:
(F)________________= __________%
(B)
Your
answer above should be 36 percent or less.
Decide with confidence
Buying a home is usually the largest purchase people make in
their lives, so it makes sense to understand the home buying process. First,
consider all of your alternatives. If possible, discuss them with a mortgage
representative or your real estate broker. Sometimes these ratios will vary with
different loan programs available and depending upon your credit scores. Then
make an educated decision, comfortable in the knowledge that you have had the
best advice possible.
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