A home purchase is one of the largest investments that an individual or family will ever make, but many prospective buyers simply don’t know where to start. Real estate listings are abundantly easy to find both online and offline, and the majority of consumers can quickly become overwhelmed. While the process may be enjoyable and exciting, it is important to understand that shopping outside of an acceptable price range can quickly become frustrating and discouraging. The best course of action for any consumer to take is to determine how much they can borrow prior to beginning the search for their new home.
Calculating the amount of money that can be borrowed is not difficult, but it does require the consumer to collect several things:
- Bank Statements
- Copy of Credit Report(s)
- Pay Stubs
- Monthly Recurring Bills
- Loan and Balance Information for Any Open Accounts
After a consumer has collected all of the above items, the next step is to carefully make a balance sheet. Any assets should be listed on one side, and all liabilities should be listed on the other. A common misconception is that mortgage companies are only concerned about income, but the truth of the matter is that the amount of assets that a person has could actually play more of an important role in some applications. In a case where a person doesn’t have steady income or is retired with no verifiable money coming in, a lender will often allow a consumer to borrow up to half of their fixed assets. First time home buyers should not be discouraged when making a balance sheet, and they are not expected to have substantial assets.
Pay stubs will help establish the income that a person can count on, but it isn’t just as easy as choosing a couple particular ones to include. Most lenders are going to want to calculate income based on base pay alone without overtime or holiday compensation, so any person that works excessive hours may need to look at their previous tax returns to establish an average income. It is important to note that lenders look at gross pay, but an individual should use net pay to calculate what they can borrow in order to keep the mortgage payment affordable.
Any and all bills should be totaled up and listed on a separate sheet of paper. Mortgage lenders do not care about any of the recurring bills such as utilities, but the fixed liabilities should be totaled together. The only bills that a lender is going to see are the ones present on the credit reports that have been gathered. These amounts should be totaled, but any accounts that are almost paid off can be excluded.
Once an individual has the information at hand, the easiest way to calculate how much can be borrowed is by dividing the total income by the fixed expenses. A consumer’s mortgage payment can often be as high as a third of their gross income, but it will also depend on their specific credit situation. A mortgage calculator can be used to determine what kind of payment different amounts borrowed would create. All of the payments added together, including the new mortgage, must be less than two thirds of a person’s income.
Although it may seem like a fair amount of work to gather all of the information and perform the analysis, the good news is that all of the tedious details will come in handy when a mortgage is actually applied for. The application process will be a breeze, and all of the necessary documents will have already been put together. After determining how much a consumer will be able to borrow, the selection process becomes a whole lot easier.
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