mortgage pre-approval?

Question

My husband and I are beginning the process of buying our first home. We'll be setting up an appt. soon for a pre-approval to then begin looking at houses. I know that typically lenders approve for more than it is advised to borrow and I'm wondering if anyone can give me a good formula for about how much we'll qualify for vs. how much we should ideally not exceed - I've tried online calculators but they are all so different! We make 85000/year and have 700/month in debt. Also - since pre-approvals expire, if we don't find a house within the time frame given will we have to get pre-approved again? Thanks for your help!

Answer 1

The best method to proceed would be to determine how much you can afford. Think about the house you want and how much it cost. Have the lender work out the monthly payments and if you think that's too high then decrease the price. Once you determine the monthly payment you can manage every month then that's the house price you'll set out to look for. There are a lot of no income/no doc loans with great rates where you don't even have to worry about your income. All you need a good credit history. I work for Citibank and this is pretty much what 95% of first-time homebuyer does.
Most of the time the pre-approval is valid for 3 months which I think is a long time. If it expires and for some reason you didn't find a house, then yes, you'll have to get another letter. But it'll be very easy. The lender will just have to get another credit check done. Good luck house-hunting.

Answer 2

30 year fixed rates are in the 6.5-6.75% range right now.

Ideally, you want to stay under 40% of your gross monthly income for total debts, about $2800-2900/mo.

You didn't say what kind of downpayment you have, so estimates are a little sketchy. But assuming you have a max of $2200 to spend on housing, you're likely in the $225-275K loan amount range. Depends on what taxes and insurance are in your area, as well as if you need mortgage insurance or a higher-rate 2nd mortgage.

It's likely that most lenders would easily approve you for $300K, upwards of $400K. That would put you in the 50-55% debt-to-income (DTI) ratio range, with about $4000 of your after-tax income going towards debt.

That's a great way to end up house-poor. Stay within the 35-40% DTI range, where you can still put 10% of your income into 401K's and still have enough to live comfortably. It's good that you're aware that you needn't accept your max loan amount, just because they'll give it to you. That mentality should help you avoid the problems so many other families are having right now, after stretching too far to buy a home.

Reading some of the other answers, Option ARMs must be avoided. Always expect to pay for the appraisal on your home, that's just a strange comment. Do shop several lenders upfront, and reshop them once you have signed your purchase agreement, to avoid the bait and switch.

Good luck.

Answer 3

A ball park number is good to get you started in the right direction so that you are shopping in your affordable price range. However, when it comes to sealing the deal shop, shop, and shop for the best interest rate. Stay away from small mortgage type companies and stick with big name banks especially with the present economy problems. It is a buyer's market so you should be able to find a great deal. Do not strap yourself financially, buy within your means. Remember the other bills involved to maintain a home. This is why so many people are foreclosing on their homes right now. Remember to take into consideration the location of the house - area and a desirable school district is very important. Think about future resale value. Hire a home inspector before purchasing. Good luck and enjoy the process.

Answer 4

You can always lower the amount of house you purchase thus lowering your monthly payment. Since you will have a pre-approval you will know the interest rate, the amortization,now you have the sales price, so it would you will be able to very easily figure out the monthly payments.

Having two parts of the equation makes it easy to figure out the other. Thus you will always stay with in your monthly budget.

You have to do this for each house as each house will be priced differently.

I hope this has been of some use to you, good luck.

"FIGHT ON"

Answer 5

There are 2 commonly used guidelines. Your mortgage payment should not exceed about 28% of gross monthly income and your total debt load including housing should not exceed 35% of gross monthly income.

Using your gross monthly income of $7083, the 28% rule works out to $1,983 and the 35% rule less your current debt works out to about $1,780 so you shoud be shooting for a monthly mortgage payment of less than $1,780.

At 6.25% on a 30 year fixed, that works out to a mortgage of about $289,000. Assuming a 20% down payment, your maximum price should be in no more than about $360,000.

It is wise to aim lower so that you are not financially stretched. How much lower you might be able to go will depend a lot upon where you are trying to buy. In some parts of the country, you'll be hard pressed to get anything decent for that money but in others it would buy a near palace.

The place I'm currently in was priced at about 75% of my maximum price. Making the mortgage payments has never been an issue nor have I had any problems being able to afford repairs when they were needed. That's a comfortable place to be in.

Answer 6

About a fourth of your monthly net income is a reasonable payment. And yes, if you don't find a house by the time limit, the approval process has to be done again. Have you talked points and interest with the bank or company with your loan package? You should, and you're entitled to shop around.

Answer 7

A good rule of thumb to use is to keep $600/month + $100/month/person in your family of disposable income before really looking for a home. So, if you 2 kids, you would want 600/month + 100*4 (4 people in you family) = 1000 disposable income each month. Now, that is not including bills such as phone, cable, internet, food, or that stuff. Instead, only include the bills you would see on your credit report such as credit cards, auto/personal loans, that type of thing. So you should be fine there, unless you have a large family, or are overly frivilous. But that can always be changed with different budget plans.

When wondering how much "house" you can afford, a conservative estimate is to use 2 times your yearly income. So 85K * 2 = 170,000 house. If you REALLY want to, you can go 2.5 for 212,500 but not more than that. Other people say 3, but I think that is irresponsible.

Okay, now the crunch time. Type of mortgages. If you are putting 20% down then you SHOULD get into a good note. If you go 100% financing or in between, you will find yourself in a bad spot. 10% is the minimum I would want to put down on a home. So this is the money you will have to front once all is said and done. this way, if you have a 100K home, you will have a mortgage for 80K (20K down as it is 20% of 100K). This puts you into a whole new bracket, because rates increase as risk increases. One of the main risks is equity left in the home. If you go 100% financing, that's huge risk, so you will have higher rates. If you have 50% of the equity left (50K mortgage on a home worht 100K) that is ridiculously low risk. Anyway, 80% is great.

Another risk to the mortage company/bank is your credit. Depending on what your credit is, your risk will increase or decrease. If your credit is above 680 you have little to be concerned with here. HOWEVER, it must be the credit of the primary signer AKA the primary breadwinner. If you make all 85K, but your credit is at 300, you cannot just throw your husbands 800 score on there with his $0 income.

One of the last risks is capacity to repay. This is income and reservers. You look good on income, just check the disposable, and then try to get 6 months worth of reserves built up. These reserves should cover all your credit expenses (credit cards, auto payments AND THE MORTGAGE PAYMENT for 6 months, but not necessarily the disposable income.)

Now, what you really don't want to get into are interest only mortgages, especially if you put money down. With these you are not paying down the mortgage principal, only paying off the interest. At the end of 1, 2, 3, or 5 years the become principal AND interest on a number of years minus the already spent years. For example, after 3 years, my I/O payments suddenly go from paying off $900/month of just interest on a 30 year term to 1400/month on a 27 year term.

Variable rates aren't bad, just for certain people. If your credit stinks, work with the lender to set caps on your rate, and in 2 or 3 years refinance. Also, make sure the lender doesn't sell their mortgages, and that they refinance at no charge so there won't be wild surprises when it is time to do so. If your credit is above the 680 though, forget the variable. Especially if you put money down.

STAY CLEAR OF OPTION ARMS! Any loan that gives you "payment options" is an evil loan. They will say something like 1% rate or something crazy. They don't exist. The 1 or 3% rate is a fake rate. You can get taht $300 payment on a 400,000 home, but that is based off of an interest rate that is artificially low. In fact, your actual rate will be much higher, so you will not be even paying off the interest with that. For example, if you take this kind of loan at $100,000, in 5 years you could end up owing $115,000 on a home worth the 100,000 you originally signed it at.
Tell tale signs that you are looking at an Option ARM: multiple payment options, generally 4. One is super low, the other is listed as Interest Only, the third is generally a 30 "fixed" term, and the last is a 15 "fixed" term. The truth is this rate changes month to month, and most people lose their homes in this mortgage at the end of the 5 year variable rate, when the minimum payment drops, and you only have the last 2 high payments, that got higher and higher each month because you weren't paying down the principal. Another is a rate that is listed at 1% or as low as 4%. They don't exist. Anything with Payment in the title of the loan. Payment Advantage, Pay Option Arm, Payment Security, Payment Flex Option. These are are the devils work.

Be careful, and don't rush it. You shouldn't have to pay for the appraisal, and if you are paying 5% in closing fees, you should have a low rate. Use the idea of a teeter-totter to balance these two out. Closing fees on one end, rate on the other. Increase rate, to decrease fees, and vice-a-versa. If you only plan to be there 1 or 2 years, max out rate. If you want to be there 5 to 10 years or longer, increase fees to lower rate. It will pay for itself in the long run.

Okay, and finally to answer your question, a pre-approval doesn't really exist. This is going to just be an estimate, or GFE (good faith estimate). You will see on the paper that "...actual costs may be more or less..." Unless you put money down on this, it can change minute to minute.

Remember, you are not legally obligated to ANYTHING until you sign that final note. If you get to the signing table, and they have changed it on you (they played a bait and switch) run away from them cuz they are SOB's. Get more than one offer, from more than one institution.