Generally, lenders allow your total monthly housing costs to go as high as, but not more than, 30 percent of your gross monthly income. The second requirement is that not more than 36 percent of your gross monthly income can be tied up in the total monthly house payment and payments on long-term debt (credit cards and car payments). In our high cost area was often exceeded considerably. That’s not always the case any longer and you lender will tell you what percentage of debt you can carry.
Today with money so hard to get, lenders are checking people over and under a microscope. We are seeing money dry up for mortgages at the upper levels, where there are so many beautiful houses for sale and at some amazing prices. Where we are seeing a great deal of money is for entry level homes, those where a Conforming Loan can be used. In San Mateo County it’s been a long time since conforming loans were seen and thanks to Congress raising the limits to $729,750 but that goes away in December, never to be seen again. <Sob>Starting in January they move down to $625,500 which is certainly higher than before but $104,250 less then right now.
Be prepared for an intimate relationship with your lender and you must open up your financial data completely. It will feel invasive, but it’s the only way you’ll get that mortgage today. Lenders use slightly different formulas for determining the “total monthly house payment.” These costs generally include the mortgage principal and interest payment, property taxes as a monthly sum, and hazard insurance as a monthly sum. These four items are referred to as PITI (principal, interest, taxes and insurance). Other costs may be included in this calculation if your down payment is less than 20 percent or if you are responsible for homeowners association dues. The calculations may vary from lender to lender, but will provide you with a gauge.
The Pre-Approval Letter
Your friends and family may know you to be reliable, dependable, and someone who pays bills on time, but for all the others in a real estate transaction you will be required to prove it. Thats where pre-approval comes in. A pre-approval letter is more reliable than a pre-qualification letter. In the pre-approval process, a lender will examine your finances and will make a preliminary statement on the size of the loan for which youll qualify.
Pre-approval is an involved process. The lender will take all pertinent information regarding your finances and perform an extensive check on your current financial status. This procedure will ultimately give you the exact loan amount that you will be eligible for (depending on what type of loan you decide to select.) Being pre-approved lets the seller know that you have gone through an extensive financial evaluation and there should be no unexpected obstacles to buying the home. It makes your offer much stronger.
Pre-approval gives you a very good indication of:
- How much down payment youll need
- Your closing costs
- Your monthly payment (including PITI: principal, interest, taxes and insurance)
- The type of loan for which you qualify and which best suits your needs; and,
- Special programs for which you may be qualified, including those for veterans, first-time buyers, teachers, etc.
To become pre-approved you will need to provide a lender with the following:
- Your employment and income history (including recent pay stubs)
- Your monthly debts
- The amount and source of cash available for the down payment and closing costs
- Possibly up to 2 years of tax returns
Pre-approval letters are not binding on the lender; they are subject to an appraisal of the home you want to purchase and are time sensitive. If your financial situation changes, interest rates rise or a pre-determined date passes, the lender will review your situation and recalculate your maximum mortgage amount accordingly. You can research lenders yourself and ask them to pre-approve you before meeting with a Realtor. If you haven’t done this in advance, then expect to have your Realtor, moi, require this process before going out to see any houses. It’s something I require up front and it saves everyone time getting it done first.
Today, you’d have to had been living in outer space not to be aware of the changes in the financial world. Yes, there is money out there to lend, and yes, even some at 100%; financing, but only for a slim few who truly qualify. There are some super first time home buyer programs out there that even include down payment assist. You, as the future home buyer needs to qualify and have a secure job. That’s to be expected. For some reason many lenders forgot about that last thing, until now.