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Mortgage
Prequalification
How Much Can I Borrow? - Check Your Ratios
There is not a "cut and dry" answer to that
question. With traditional financing, the general
rule of thumb has been to follow the 28/36 rule. This
means that your house payment including taxes, insurance,
and any homeowner’s dues should not be more than
28% of your gross monthly pay (this is called your
“front end ratio”). Likewise, all of your
monthly liabilities that appear on your credit report
should not exceed 36% of your gross monthly pay (this
is referred to as your “back end ratio”).
To Calculate:
Front End Ratio = estimate your monthly mortgage
payment /gross monthly pay
Back End Ratio = estimate all of your monthly payments
listed on your credit report / gross monthly pay.
Your ratios are only one variable which determine
how much you can borrow. What you really need to ask
yourself is “how much can I afford to pay each
month?” Start there and then call a one of the
mortgage lenders and brokers found in mortgage
rate search survey found on this site and find
out exactly what programs and rates exist for your
particular situation.
Mortgage Pre-qualification and Mortgage Pre-approval
In a today’s real estate market, sellers are typically
looking for some evidence that you are qualified to
buy before they accept your offer. Without a mortgage
pre-qualification or home loan pre-approval letter,
you may find yourself at a competitive disadvantage
if there are competing offers and the other buyers have
shown the goodwill of seeking out financing ahead of
time.
What is the difference between the two terms?
A mortgage pre-qualification typically implies that
you have spoken with a mortgage banker or lender and,
based upon the information that you have provided, are
qualified to borrow ''X''amount of money. A mortgage
pre-qualification letter is a good start but often comes
with some vague language and a laundry list of ''outs''
that may not build confidence in the seller’s or
real estate agent’s mind. A mortgage pre-approval
takes the process to a new level. Mortgage pre-approval
letters may indicate that the borrower has met with
a banker or lender and that the borrower has been approved
for a mortgage with a very limited list of pending items
(typically the appraisal and final underwriting review
need to be completed). Some homeowners may not understand
the difference but, believe us, most real estate agents
do and they have their customers’ ears. We suggest
taking the time and to obtain a home loan pre-approval.
Other First Time Homebuyer Resources:
