How Lenders Determine How Much to Lend
In general, 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 no 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.
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 homeowner’s association dues. The calculations may vary from lender to lender, but will provide you with a gauge.
How to get Pre-Approved for a Mortgage
Most lenders can pre-qualify you for a mortgage over the phone. Based on general questions about your income, debt, assets and credit history, lenders can estimate how much mortgage you qualify for.
However, being pre-qualified and pre-approved are different things
Pre-approval means that you have applied for a mortgage; you have filled out the mortgage application, received your credit report, and verified your employment, assets, etc. When you are pre-approved, you know exactly what the maximum loan amount will be.
A pre-qualification letter is not verified and, does not count for much if you are competing with other buyers who are pre-approved.
When you are pre-approved for a loan, you and the seller know exactly how much house you can afford. It gives you credibility as an interested buyer and lets the seller know immediately that you will qualify for a loan to buy their property. It makes your offer much more powerful and in today’s market is a necessity.