Getting Started: Take a Financial Snapshot
Before you apply for a home loan, you'll want to take a snapshot of your personal finances to find out exactly where you stand. A financial snapshot helps you calculate your debt to income ratio, which gives you a closer look at your overall financial situation.
Most lenders look at your income vs. your debt to decide if they'll approve you and how much they're willing to lend you. That's why it's extremely important to walk through this exercise before you start applying for loans.
Your debt to income ratio is the difference the amount of money you earn and the debts you owe. To get a snapshot of your current financial situation, walk through the following steps:
If you spend most or all of your income paying off monthly debts, a lender will probably see you as high risk. After all, they don't want you take out a loan that will overload you to the point that you can't pay off all your monthly debts.
1. Gather up your financial information. Assemble all of your financial documents, including check stubs, credit card statements, mortgage statements and other loan statements.
2. Tally up your monthly income. Add up all of your regular and recurring income you can document, including:
Gross monthly income
Any other recurring monthly income
Income producing assets such as real estate or stocks
3. Calculate your monthly debt load. Add up all your monthly debt obligations, including:
Loans, including your mortgage, car loans, student loans or other bank loans
Credit cards (Use the minimum monthly payment)
Any other monthly debts you must pay to individuals or businesses
4. Make the comparison. Compare your total monthly income to your total monthly debt service to figure out your income vs. debt.
Generally, lenders don't want you to spend more than 28% of your gross monthly income on your monthly housing expense, which includes your mortgage payment, taxes, insurance and any HOA dues. Additionally, your proposed monthly housing expense combined with your total monthly debt service cannot exceed 36% of your gross monthly income. If it does exceed 36%, you will probably not be approved for the loan.
Of course, every borrower's situation is unique, and some lenders are flexible on these guidelines in certain cases. For example, if you have a large down payment saved up for your new home, your lender may not be quite as concerned with your monthly debt load.
Keep in mind that there are countless loan programs out there, each with different guidelines. Just because you aren't approved for one type of loan doesn't mean that you won't be approved for any loan. If you do your homework, shop around and talk to a few different lenders, you'll probably be able to find a loan that fits your needs.