Loans depend on two expense, income ratios


April 24, 1994|By Dian Hymer

How will a lender prequalify me for a loan?

The easiest way to get prequalified for a home loan is to call a loan agent or mortgage broker and make an appointment to review your financial situation. Here's how a lender will look at your finances to determine what price house you can afford.

Lenders think in terms of two ratios when they're qualifying you for a home loan. Each ratio expresses your expenses as a percentage of your income.

The first ratio the lender looks at is the ratio between the monthly cost of buying your new home (your monthly housing expense) and your gross monthly income (before deducting for income taxes).

Lenders usually don't want your monthly housing expense to exceed 28 to 30 percent of your gross monthly income. The more cash you can put down, the more flexible the lender will be. Borrowers who put 10 percent or less cash down can expect to be qualified based on a 28 percent ratio.

A lender will multiply your gross monthly income by 28 or 30 percent, depending on your cash down situation. The result is bTC the maximum amount the lender will allow you to spend for your monthly housing expense. The monthly housing expense includes the mortgage payment (principal and interest), property taxes, hazard insurance and homeowner association dues, if you're buying a townhouse or condominium.

The second ratio the lenders use is the ratio between your total monthly debt (housing expense combined with other debts) and your gross monthly income. The lender will tally your outstanding debts and calculate the minimum amount required each month to pay back these debts. Your debts will include bills that won't be paid off within the next few months, such as car payments, student loans and charge card accounts.

Lenders usually don't want your total monthly debt to exceed 36 percent of your gross monthly income. The lender will multiply your gross monthly income by 36 percent, then subtract your monthly debt obligation from this amount.

If the balance is equal to or larger than the maximum housing expense figure calculated above (using 28 or 30 percent of your gross monthly income), you won't have trouble qualifying. If the balance is less than that figure, this means your debt level is high and the lender won't qualify you for as large a loan.

The home you can afford also depends on the amount of cash you have for your down payment and closing costs. Closing costs vary from one area to the next but they can run about 5 percent of the purchase price.

The lender will subtract an amount to cover closing costs from the cash you have available. The balance will be added to the loan amount you qualify for to determine the price home you can afford.

FIRST-TIME TIP: One way to increase your purchasing power is to reduce the amount of debt you are paying off before you attempt to qualify for a loan. This can be accomplished by paying debts down or consolidating high-interest rate debts into one lower interest rate loan.

Another way is to choose an adjustable-rate mortgage (ARM). If your ratios are marginal, talk to a portfolio lender. Portfolio lenders don't sell their loans on the secondary money market, so they can be more flexible in their loan qualification guidelines.

THE CLOSING: Your income and debt are just two factors that a lender will consider in qualifying you for a home loan. Your credit record, employment history, the property appraisal and title to .. the property will also be examined by the lender before you'll be given a loan.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif. 94618.

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