There are 4 Main Criteria required to satisfy your potential lender.
The last of these is Affordability.
Effective January 1, 2018 - All Conventional Mortgages, including Home Purchases with 20% or more down payment and Refinanced Homes, are required to qualify at the Contract Rate PLUS 2%.
Are you sure you want to try and wrap your brain around this?? Alright...but you've been warned.
You may be used to paying $1200.00/month for rent...but when it comes to Affording a Mortgage...things are a little different.
We look at a MUCH larger picture. We are gonna get into some hairy details here so be prepared.
First off, we have to establish how much of your Gross Monthly Income (gross income is before deductions) we can use for your Total potential Debt Load...or as we in the industry like to call it, your Total Debt Service Ratio (TDSR).
We can go one of two ways here:
1. If you have Rock Star Credit and have a strong Credit Score, we can use up to 44% of your Gross Monthly Income.
2. If you don't have Rock Star Credit and you don't have a Strong Credit Score, we can use up to 42% of your Monthly Income.
We know...it's hardly a difference - but hey, privilege is privilege, no matter how small...insert dirty joke here. Hahaha...wait, it can't only be me that was thinking it - or was it??
Let's break it down with this example:
Gross Monthly Earnings are $4000.00/month.
$400.00/month Auto Loan
$5000.00 Visa Balance (We use 3% of the Balance for a Payment...$5000.00 X 3% = $150.00)
And now...the MAGIC!
TDSR: $4000.00 X 42% (average credit) = $1680.00
$1680.00 - $400.00 (Auto) - $150.00 (Visa Payment) = $1130.00
That $1130.00 remaining is what's left for you to spend on your potential New Housing Debt, as long as that $1130.00 is equal to or Lower than the Gross Debt Service Ratio (GDSR) calculation. Keep reading...
The GDSR is a bit more finicky than the TDSR...that's because we have to use the lower of either the GDSR Calculation (below) and the Number remaining after all other debts have been accounted for from the TDSR (as above).
The GDSR can also be impacted by your Credit Score:
1. If you have Rock Star Credit and have a strong Credit Score, then we can go up to 39% of your Gross Monthly Income.
2. If you don't have Rock Star Credit and don't have a strong Credit Score, then we can go up to 35% of your Gross Monthly Income.
Again..it's not a very big privilege - but more often than not, that little bit of room can really come in handy!
Using the Example above...the Maximum GDSR for a person with average credit would come down to the lower of the two:
$1130.00 (amount remainig after other debts accounted for from the TDSR)
$4000.00 X 35% = $1400.00 (Raw Calculation for GDSR).
In this case, the $1130.00 would be the maximum we would permit for a person for their New Housing Debt.
New Housing Debt includes the Mortgage Payment (Principal and Interest), Monthly Property Taxes, a Monthly Heat/Utility Payment (Default $100.00/month), and 1/2 of Monthly Condo Fees if applicable.
Confused? So is everyone else! Just wait till you see the NEW Down Payment requirements on purchases over $500,000.00!!
As of February 15, 2016 - Down Payment rules have changed for purchases over $500,000.00.
The new rules require a minimum Down Payment of 5% on the first $500,000.00 and then 10% on the Balance.
For example - if you purchase a home for $600,000.00 - you would have to put down $25,000.00 for the first $500,000.00 and then an additional $10,000.00 for the extra $100,000.00 you are borrowing...this equates to $35,000.00.
Under the old rules of a straight 5% Down Payment requirement - the total Down Payment required would have been $30,000.00 - so this new requirement is going to sting a few.
Don't worry about trying to do the math on your own...our calculator will be able to do it for you! Just click on the link below.
Our Mortgage Calculator is built to make your life easy - it can't establish the Ratio's yet (but we are working on it!) but it can at least give you an idea on what you should expect for payments.
This is why there are professionals for everything...while we make it look easy - it can be really complex!
Don't beat yourself up if you don't understand this stuff...take comfort in knowing we at FOCUS do understand it, and we will take the time to help you understand it as it pertains to your unique situation.
You know what...you can also just call us too to be sure. Here's the number:
Where do you want to go from here?