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How
much house can I afford?
Can I find out generally on
my own?
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How
much house can I afford?
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Federal
National Mortgage Corporation otherwise known
as Fanny Mae and The Federal Home Loan Bank
Board, known as Freddie Mac, are two of the
largest investors in real estate loans. They
act as a central bank to the real estate industry.
These two giants have certain "underwriting
standards" that purchasers must meet in
order to obtain a mortgage through most lenders.
Their standards include the ratio of
loan to value (LTV) of the home being
purchased, the buyer's credit worthiness, his
debt structure, stability of employment and
many more!
Their underwriting requirements are demanding,
but generally their rates are the best available.
More often than not, the lender that gave you
your mortgage will sell your loan to Fannie
Mae or Freddie Mac. These two giants in turn
will sell your loan to investors such as trust
funds, etc. who have money to invest. That is
why often you will receive a letter from your
lender advising you to make your payments to
another bank or credit institution.
Never change the lender you are sending your
payment to without the prior written notification
of your present lender to avoid fraud!
There are different types of underwriting standards.
Class A loans are generally Fannie Mae and Freddie
Mac standards. Class "B" and "C"
loans require a combination of a higher down
payment, higher closing costs and/or a higher
interest rate for borrowers whose income and/or
credit do meet class "A" standards.
When you apply for your loan, you will hear
your loan officer talk about your "Front
End Ratio" and your "Rear End Ratio".
There is a maximum ratio allowed by lenders
when they compare your gross monthly income
to your house payment. This ratio is called
your "Front End Ratio". For Fannie
Mae and Freddie Mac, the ratio is about 28%.
Your "Rear End Ratio" is the ratio
of your house payment plus all of your monthly
installment and revolving debt as compared to
your gross monthly income. For Fannie Mae, this
ratio is about 36%.
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Calculating
my front end ratio |
1. |
If
my gross monthly income is $1,000 per
month, what would be my maximum front-end
payment? |
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$1,000.00
X 28% = $280.00 Maximum house payment
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This
amount includes principal, interest,
taxes, insurance, PMI (Private Mortgage
Insurance) and homeowner's association
dues based on FNMA (Fannie Mae) guidelines. |
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Calculating
my rear end ratio |
2. |
What
would be the maximum combined monthly
house payment and monthly debts I could
have in order to qualify for the above
loan based on my $1,000.00 per month
income? |
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$1,000.00
X 36% = $360.00 Combined total of house
payment and installment loans based
on FNMA guidelines |
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How
much can I pay in monthly credit card
payments & installment loans &
still be qualified |
3. |
Subtract
$360.00 -280.00 = $80.00 Available for
monthly installment loans/revolving
credit payments |
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Most
people qualify for a larger house payment
than they are willing to make! |
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My
ratios exceed 28% and 36%. What can
I do?! |
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There
are programs available depending on
your income and credit that your ratios
can go up to 52%! This is why you need
a loan officer to advise you of the
best financing program available for
your particular needs. |
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