Applying for a home loan (a.k.a. mortgage) can feel overwhelming. Establishing and managing your finances regularly can ease a lot of the stress that comes along with committing yourself to a 30-year house payment. Here is a basic method for helping ensure that you don’t get over your head when you decide to buy.
Mortgage lenders typically base your loan approval on these 3 main variables:
Income
Assets
Credit
Mortgage lenders calculate your total qualified monthly income (before taxes) and divide it by your total monthly debt. This is known as the “debt to income ratio” or DTI. Obviously, the lower the DTI, the better. Many recommend keeping the DTI under 45%. However, this calculation doesn’t consider all of your expenses, i.e. food, healthcare, fuel, childcare, insurance, utilities, savings, etc…
These 3 main variables also happen to be critical components to your budget. The goal of any personal budget should be to have less going out than what’s coming in. However, many don’t account for all expenses and that’s not good.
According to Money.com the top 5 sources of personal debt are:
1. Credit cards (28%)
2. Car loans (12%)
3. Medical debt (7%)
4. Home equity loans / lines of credit (6%)
5. Personal education loans (5%)
Christian Mitchell (chief customer officer at Northwestern Mutual) mentioned in a recent news release, “It can be a slippery slope between manageable debt and runaway debt, so it’s an important time to remain extra vigilant about planning and spending.”
As a result, what you qualify for and what fits comfortably within your budget can be two very different figures. Be sure to take the time and build your personal budget if you haven’t already. Know it. Live by it. Treat it as a living, breathing document because your income will fluctuate and so will your expenses.
Here is a snapshot of what a healthy personal budget may look like. The yellow highlights represent how a mortgage lender calculates DTI. The green highlights how to calculate your total DTI.
Source: Terry Roberts Senior Mortgage Broker NMLS 397987 Personal Budget Sample
When applying for a home loan and trying to figure out how much you can afford, I always recommend looking at both, lender DTI and your personal (total) DTI as well as taking into consideration what your future goals are.
Contact me today to start planning your next home purchase or just a basic budget. I’d be happy to assist.
Buying a home is likely the largest single purchase that you will make in your entire life! Let me help you make it an enjoyable experience and not one that you will regret.
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Terry Roberts, USMC Veteran Sr. Mortgage Broker NMLS 397987 E Mortgage Capital, NMLS 1416824
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America.
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