Find out how much you can borrow

The first step in obtaining a mortgage loan is to determine how much money you can borrow.  We can quickly determine how much home you can afford even before you begin looking. By answering a few simple questions, we will calculate your buying power, based on standard lender guidelines.

Keep in mind that Pre-Approval is something that happens after we pull your credit report and verify additional information regarding your financial situation. This additional information can affect the ultimate amount that you will qualify for, thus affecting you shopping budget.

Ratios used in Mortgage Qualifying

When analyzing a borrower’s loan application (Form 1003), lenders use two different debt ratios to determine if the borrower can afford his/her obligations. Known as the "Top" and "Bottom" ratios, the top ratio consists of monthly housing expense known as PITI (principal, interest, taxes, homeowner’s insurance, and condo fee, and possibly PMI) divided by gross monthly income. The bottom ratio consists of PITIM plus all monthly consumer debt payments (cars, credit cards, student loans, etc.) divided by gross monthly income.

Fannie Mae/Freddie Mae guidelines say that the top and bottom ratios should not exceed 28 over 36 (28/36) when placing a down payment less than 20%. If your down payment is 20% or greater, they will typically approve up to 33/45 ratios.

FHA guidelines say that your ratios should not exceed 31/43 and VA guidelines say just one overall ratio of 41%. If your ratios exceed the standard guidelines, don't worry,
there are other programs that allow back end ratios to go as high as 45-50% with compensating factors such as low Loan to Value (LTV) or high borrower liquidity.

It’s best to have your SNMC loan consultant pull your credit report early in the process so you know exactly what consumer debt shows on it. This will also give you a chance to improve your ratios by taking recommended credit score improvement strategy. Don’t assume that paying off a debt will help your credit.

LTV Ratios

LTV or Loan-To-Value ratio is the maximum amount of exposure that a lender is willing to accept in financing your purchase. Lenders are usually prepared to lend a higher percentage of the value, to creditworthy borrowers.

Self-Employed Borrowers

Self-employed individuals often find that there are greater hurdles to borrowing for them than an employed person. For many conventional lenders the challenge with lending to the self-employed is documenting an applicant's income. Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information through their employer. In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for 2 years.

Source of Down Payment

Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. It is generally expected that these funds be borrower's own saving, although a borrower may receive non-returnable gifts towards down payment and other loan fees with some loan products. Check with your loan consultant for requirements on the mortgage products that you are considering.

Important factors to consider when shopping for a mortgage

Traditionally, mortgages fall into two broad categories: Those with a fixed interest rate and those with an adjustable rate. With a fixed rate mortgage, you usually pay the same amount each month for as long as you carry the loan. These mortgages can mean less risk and less worry about the future, but typically have a slightly higher interest rate than the initial rates offered by adjustable rate mortgages. Adjustable rate mortgages (ARMs) usually provide you with a lower initial interest rate, but their rates change with the market, so there is always the risk that your payments will increase.

Lenders also offer other options, some of which combine the features of both traditional mortgage types. Some begin with a fixed rate for three or more years and then convert to an ARM. Others let you choose how much you pay each month. When you discuss these mortgage types, make sure you understand the pros and cons of the loan, and that your lender understands both your risk tolerance and your level of financial discipline.

Interest rates are the most visible part of any mortgage advertisement, but finding the best deal isn’t as simple as looking for the lowest posted rate. A loan with a lower rate, but higher closing costs may end up being more expensive. The best way to understand the overall cost of a mortgage is to look at its annual percentage rate (APR), which takes into account the interest rate and the loan’s other costs.

One of the most important things to consider when choosing a mortgage is to make sure you can comfortably afford the monthly payment. However, it’s not enough to simply choose the loan that provides you with the lowest payment. In most cases, you’ll want a mortgage that helps you build equity in your home. (Equity is the market value of your home minus any outstanding mortgages or liens.) If you don’t build equity, you may not be able to refinance (or sell, without bringing money to closing) if your house decreases in value. And, when you want to move to a new house, you can put the equity of your current home towards the down payment of your next home.

The mortgage term is the number of years your loan will be active. Mortgages with shorter terms carry higher monthly payments, but they can save you a lot of interest over the long term. For example, if you borrow $150,000 at 6% with a 30-year term, your monthly P&I payment will be $900. The same loan with a 15-year term will cost $1,265 a month, but you’ll pay almost $96,000 less in interest and you’ll eliminate your mortgage twice as fast.

Lenders may also offer you the chance to pay discount points to lower the interest rate of your mortgage. One point = 1 percent of the principal, so on a $200,000 loan, each point costs $2,000. Generally, for each point you purchase, you can lower your rate by about 0.25 percent. Whether this is a good deal depends on how long you plan to keep your home -- the longer you plan to stay, the more it makes sense to buy points.