Great question! I am an MLO with 10 years experience NMLS #864964
There are three main factors in being approved for a mortgage.
1. Your credit score: generally, if at least two of your three scores are above 580 and you have no major negative factors: recent bankruptcy, unsettled lawsuits, tax liens etc; the better your score the more types of loans you will be approved for.
2. Your Loan To Value (sometimes called LTV) ratio. This factors in the equity of the home, within the mortgage, while this is more of a factor on refinance loans, than purchase loans, you will be limited on how much of a mortgage you can take out based on the value of the collateral (<-fancy word for the home you got the loan on) most loans will not allow a loan for 100% of the value, meaning on a purchase, you will likely need a down payment, usually between 3.5% or 5% of the purchase price. On a refinance your loan will be limited to about 90% of the home’s value. The value is established by an appraisal ordered by your mortgage company.
3. THIS ONE IS THE MOST IMPORTANT FAVTOR IN HOW MUCH YOU WILL BE APPROVED FOR. This last main factor is Debt To Income (also called DTI) ratio. Your loan amount comes down to your income, your current monthly debt payments, and the monthly payment for the proposed loan. For a conventional mortgage loan your DTI ratio will need to be 45% or less. Your current debts are things you pay now on a monthly basis, with a balance- so for example, not a cable, cell phone or utility bill. What counts would be car loans, student loans, credit cards- things like that. Here is how you can get an idea of what you would be approved for. Take your annual gross income, and divide by 12 to get your monthly income, then multiply that number by 0.45 to find your 45% ratio. Then you subtract your current monthly debts. What is left over is the maximum amount your monthly payment can be for your mortgage. You then have to figure out how much of a loan that payment would support. So for example let’s say you make $12,000 per year before taxes, that breaks down to $1000 per month. 45% of that would be $450. Let’s also say that you only have a $50 monthly student loan payment and a $50 monthly car payment, we would subtract both of those from the $450 leaving you a maximum monthly mortgage payment available of $350. you can play around with mortgage calculators online to figure out how much of a mortgage that would support, but it’s probably going to get you around $45,000 or so
I hope that this was helpful!
-Matthew Boswell in Indianapolis
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