Qualifying for a mortgage

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Qualifying for a mortgage



3.  Qualifying for a mortgage


It’s important to know how large of a mortgage you can qualify for. This amount is usually based on a percentage of your income. Add the loan’s annual amount for principle, interest, taxes and insurance. The total is called your cost of housing. It is also called your "front end ratio" It typically should not exceed 28% of your gross income. If you don’t have much other debt, such as big car loans, school loans, credit card debt and other loans to service, you may get away with qualifying with housing costs that eat up 34% of your gross income. A second general rule is that your housing cost plus the cost of servicing other debt should not exceed 32% of your total income. This is called your "back end ratio". However, some lenders may raise this figure to 36% or even higher for borrowers that have an exceptional credit rating or are making a large down payment on the property. If you are going to spend less than 28% of your income on housing costs and less than 32% of your income on total debt service, you can probably qualify for the lowest mortgage interest rates because you will be considered a less risky borrower, assuming you have a good credit history.

Here’s an example:

Your gross annual income is (combine husband and wife) is $100,000

You should be able to safely qualify for annual housing costs of $28,000.

You should be able to safely qualify for a total annual debt service cost of $32,000.

Estimates of the amount of a mortgage one can qualify for are provided in the following table. These are only ballpark estimates based on the assumption that the borrower has a good credit rating, has made a sizable down payment of around 20% and has funds set aside for closing costs. These estimates are based on a conservative 28% mortgage debt-to-income ratio, .5% of the mortgage for initial annual principal payments, 1% of the mortgage for annual property taxes and .5% of the mortgage for annual hazard insurance

Annual          rate                   rate              rate                rate

income        6.5 %               7.0%              7.5%               8.0 %

$30,000    $ 98,824         $ 93,333          $ 88,421        $ 84,000

$35,000    $115,294        $108,889         $103,158       $ 98,000

$40,000    $131,765        $124,444         $117,895       $112,000

$45,000    $148,235         $140,000         $132,632       $126,000

$50,000    $164,706         $155,556         $147,368       $140,000

$55,000    $181,176         $171,111         $162,105        $154,000

$60,000  $197,647           $186,667         $176,842        $168,000

$65,000  $214,118           $202,222         $191,579        $182,000

$70,000  $230,588           $217,778         $206,316        $196,000

$75,000  $247,059           $233,333         $221,053        $210,000

$80,000  $263,529           $248,889         $235,789        $224,000

$85,000  $280,000           $264,444         $250,526        $238,000

$90,000  $296,471           $280,000         $265,263        $252,000

$95,000  $312,941           $295,556         $280,000        $266,000

$100,000  $329,412          $311,111       $294,737        $280,000

$105,000  $345,882          $326,667       $309,474        $294,000

$110,000   $362,353         $342,222       $324,211        $308,000

$115,000   $378,824         $357,778       $338,947        $322,000

$120,000  $395,294          $373,333        $353,684       $336,000


There can be a twist to the qualification process. There are loans called no-income verification loans, for people who cannot verify their income, and no-asset verification loans for people who cannot verify that they have assets for closing costs. These loans are also called no-doc loans. Rest assured the risk Vs return formulas are at work here. If the lender is taking a higher risk by offering mortgages without verifying the qualification of the borrower, the interest rates will be higher to offset the risk of loss. More likely, the lender will reduce his risk by requiring a large down payment and/or a stellar credit history for these loans.





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