Thursday, February 16, 2017 / by Kevin Schumacher
How to 'pre' Pre-qualify Yourself for a Mortgage Loan
Our blog, "Purchasing a Home in Northern Colorado-From the Perspective of a Young Millennial," had such a great response that we wanted to do a follow-up with additional information that could be beneficial to entry level home buyers in this fast paced market.
As we had mentioned the first step in the process of determining if you are ready to buy a home is to look further into your finances and reach out to a lender to get pre-qualified.
If you are nervous about getting pre-qualified or what you may qualify for, we are going to walk you through the formula that lenders use to determine how much you can afford. You can use this information to determine what you may qualify for before reaching out to a lender.
Step 1: Determine your income
How am I paid?
The following information will be needed in order to calculate your pre-qualification.
- Calculate your gross income: Your income before taxes, insurance, 401K, etc. are taken out.
- Calculate your net income: Your "take home" income.
- Determine your monthly gross income
- Hourly: $_____ per hour x ____ hours per week x 52 weeks / 12 months =___
- Weekly: $______ per paycheck x 52 weeks / 12 months = ______
- Every other week: $_____ per paycheck x 26 weeks / 12 months=______
- Twice-per month: $_____ per paycheck x 2 per month=_______
- Monthly: $________(per month)
A lender will use your gross income to calculate what you may qualify for.
Do I have any other sources of income?
- Part time work: $__________
- Social Security: $__________
- Retirement: $____________
- Other: $________________
Is anyone else buying the home with me?
Co-borrowers gross monthly income (using the same formulas as above): $__________
Calculate your monthly gross income
Add up your total monthly gross income from all of the categories above. If you do plan on purchasing the home with a co-borrower, include their monthly gross total here as well.
TOTAL MONTHLY GROSS INCOME: $_______________
Step 2: Determine your housing ratio
The type of loan that you use will determine your housing ratio; our previous blog recommends looking at a CHFA loan for entry level buyers and is an FHA loan.
Housing Ratio (Front edge ratio)= The maximum amount of gross monthly income that can be used towards your home payment.
FHA Loans: 31% of your gross monthly income can go towards your monthly housing costs.
Conventional Loans: 26% of your monthly income can go towards your monthly housing costs.
Calculating your monthly housing ratio
- Your gross monthly income $______ x .31* (Housing Ratio of FHA at 31%)=$_______ per month.
*Changes based on loan type
Mortgage payments typically consist of your payment (P), interest (I), taxes (T), insurance (I) and mortgage insurance (MI) (if this is applicable).
Lenders jokinly refer to this
FHA loans required to have mortgage insurance throughout the life of your loan, due to law requirements. For conventional loans you will be required to hold mortgage insurance up until you pay 20% of your loan.
YOUR MONTHLY HOUSING RATIO: $_______________
Example: John earns $3,000 gross monthly and is using a FHA loan for purchasing his home.
John's Housing Ratio: $3,000 x .31 = $930 per month that John can spend on his housing payment.
Step 3: Calculating your monthly debt
Lenders will consider your debt when calculating how much you may qualify for. With this said, lenders look at what you contractually owe in debt and if these debts have over a 10 month pay-off expectation. They will also use the minimum payment for their calculations.
If you are using your credit card as a tool (ie. paying it off in full each month) they will not consider it as a contractual owed debt.
- Credit Cards: $________
- Car Loans: $__________
- Student Loans: $ ______
- Child Support/Alimony: $_________
- Other Loans: $__________
TOTAL MONTHLY DEBT: $_________________
Debt to income ratio= maximum amount of GROSS monthly income that can we used towards your monthly HOUSING costs PLUS monthly debt.
Just like with your Housing Ratio, each loan type has certain restrictions on debt-to-income that a borrower can have.
FHA Loans: 43% of your gross monthly income can go towards your monthly housing costs and debt each month.
Conventional Loans: 36% of your monthly income can go towards your monthly housing costs and debt each month.
Calculating your debt-to-income ratio
Step 1: Your total GROSS monthly income $_______ x .43* (debt-to-income ratio of FHA at 43%)=$______ per month (housing costs monthly debt)
*Changes depending on loan type
Example: John earns $3,000 gross monthly and is using a FHA loan for purchasing his home.
John's debt-to-income: $3,000 x .43 = $1,290 per month for debt-to income ratio.
Step 2: $____________ - $___________ = $____________
(Debt-income ratio) - (Total monthly debt) = Monthly housing cost
Example: John's contractual monthly debt is $100.
$1,290-$100=$1,190 monthly housing cost
Rule: Your maximum monthly housing cost is whichever payment is LESS between the housing ratio and debt-to-income ratio. Your monthly payment can NEVER exceed the Housing Ratio.
Your maximum monthly mortgage payment is:$_________________
Example: John's maximum monthly mortgage payment considering the rule listed above is $930 because his monthly housing ratio is the lesser of these two ratios.
Throughout the remainder of this example we will assume John's maximum monthly housing cost is $930.
Step 4: Determine the maximum amount of monthly Principal and Interest
This is a two step process in order to determine how much of your monthly mortgage payment (PITI) will be going towards principal and interest.
Step 1:
Taxes and insurance typically equal around 20% of your monthly mortgage payment. To calculate the taxes and insurance you will pay each month, multiply the monthly estimated mortgage payment from previous calculations and multiply by 20%.
$______________ x .20 (20%)=$___________
(max monthly mortgage payment) x .20= (monthly taxes and insurance)
Your monthly taxes and insurance is estimated at:$_________________
Example: John's estimated taxes and insurance
$930 x .20 (20%) = $186
Step 2:
Now that you have determined how much you will pay in interest and taxes, you can determine how much you will potentially be paying in principal and interest by working backwards.
$_____________ - $_____________ = $_______________
(max monthly mortgage payment) - (taxes and insurance) = (monthly principal and interest)
Your monthly principal and insurance is estimated at:$_____________
Example: John's estimated principal and insurance
$930 - $186 = $744
Step 5: Considering the full cost (or interest) a lender will charge you for the loan
The table below is a factor table. The factor table indicates the cost the lender will charge you for each $1,000 of your mortgage loan. The factor will be determined by the type of loan and interest rate your qualify for.
| Interest Rate: | 15-Year Loan | 20-Year Loan | 30-Year Loan |
| 3.75% | 7.27 | 5.92 | 4.63 |
| 4.0% | 7.39 | 6.05 | 4.77 |
| 4.5% | 7.64 | 6.32 | 5.06 |
| 5.0% | 8.18 | 6.88 | 5.68 |
| 5.5% | 8.18 | 6.88 | 5.68 |
| 6.0% | 8.44 | 7.17 | 6.00 |
| 6.5% | 8.72 | 7.46 | 6.33 |
To calculate the interest that you will pay for each $1,000 of you loan, DIVIDE your maximum monthly principal and interest by a Factor.
_________________ / ______________ = _______________
(monthly payment and interest) / (Factor) = (interest you will pay for each $1,000 of your loan)
Example: Assuming that John's interest rate is a 4.5% interest rate FHA loan this would mean this has a factor of 5.06 for a 30-year loan.
$744 / 5.06 = $147.036
To obtain the approximate amount a lender will lend to you for the purchase of your home multiply your answer by 1,000.
__________________ x 1,000 = $__________
(interest you pay per $1,000) x 1,000= (maximum total mortgage loan amount)
Example: Assuming that John's interest rate is a 4.5% interest rate FHA loan this would mean this has a factor of 5.06 for a 30-year loan.
$147.036 x 1,000 = $147,036 as a maximum total mortgage loan amount
Congratulations you have just pre-qualified yourself for a mortgage loan!
Keep in mind that this is an estimation and that a lender will better be able to explain and assist you in knowing what you qualify for.
This is a great starting point for anyone who is hesitant about reaching out to a lender just yet and will let you know what they look at when calculating your pre-qualification.
If you have any questions regarding this or would like a reference for our preferred lender please contact us at (970) 373-2616 or Kevin@KevinSellsNoCo.com
If you are considering looking at homes at a future time we would love to set up a unique home-buyer profile for you! This will send you newly listed homes that come on the market with consideration of your price range and preferences.
We can also set you up with our weekly market trends in the area you are consider purchasing.
Please write us at KevinsTeam@KevinSellsNoCo.com if you would like us to set up a buyer profile for you.
