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Home Loan Financing Basics - Second in a Series

Qualifying for a Home Loan:

Mortgage lenders are chiefly concerned with your ability to repay your mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment, which generally runs anywhere from 5 percent to 20 percent of the purchase price of the home. The lenders generally evaluate your credit worthiness by obtaining a FICO score from one or more credit rating agencies.

So how much house can you afford? You can easily calculate the answer using two standard debt-to-income ratios:

  • The housing expense, or front-end ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense.
  • The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.

  • There are  calculators that are useful in determining how much home you can afford , whether a buyer can afford a house at a given price , which tells you the approx. amount that your monthly income needs to be to afford the house (when using this calculator, the amount given as "maximum debt service permitted" means other debt service, such as car payments, credit card payments, and other consumer installment payments; click on the "full details" box to get mortgage payments, monthly taxes, etc.) , or whether to buy now or continue to rent and save for a larger down payment

    For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at http://www.maureenmegowan.com . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

    Comment balloon 0 commentsMaureen Megowan • August 20 2009 02:31PM

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