HOW MUCH HOME CAN I AFFORD?

If you’re considering getting a mortgage for a new home, you’re surely asking yourself a series of questions. What are the best neighborhoods? Do I want a 2-story or a ranch? What kind of schools does my desired neighborhood have? These questions are generally the same whether you’re home shopping in State College or anywhere else.

Perhaps the most important question of all is a simple one: Can I afford this house?

D. Shane Whitteker is the owner and chief broker at Principle Home Mortgage, a mortgage company located in State College, Pennsylvania. Whitteker specializes in helping his clients to safely navigate the mortgage waters. One way he helps is by working with his clients to define how much house they can afford.

Understand Your DTI Ratio

There are a number of factors at play, including income, debt, and other financial responsibilities. According to Whitteker, there are two ratios that play a vital factor in determining how much house you can afford.

“First you need to be able to qualify for the mortgage based on guidelines and debt to income ratio requirements,” Whitteker says. “You have two ratios to be concerned with when getting a home mortgage, front end and back end ratios. The first, front end references your debt to income ratio before your housing expenses are included when purchasing or refinancing a home. The second, your back end ratio references your total debt to income ratio including housing expenses which factors in principle, interest, home owners insurance, real estate taxes and any homeowner association dues.”

Other Factors

When considering these ratios you may think you qualify if your back end ratio is under the limit, but there are other factors considered by the bank. For example if your front end ratio is zero and your back end ratio is 53%, you probably won’t qualify since the bank understands that at some point additional debt may push your future total debt ratio to a limit that is a risk concern to the bank.

Different loan programs have different DTI (debt to income) ratio requirements. Some loans have higher debt to income ratios, others have lower ratios. Its important to understand the specific DTI of the home mortgage loan you’re trying to get.

“In my opinion FHA products have the least stringent requirements for DTI,” Whitteker says. “USDA, VA, FHA, and conventional loan programs all have different ratio requirements and other requirements associated with higher ratios,” Whitteker says. “This means you might qualify with a higher DTI ratio if other aspects of the mortgage application allow for this.”

What’s the Total Cost?

Have you considered not just your mortgage, but also the other expenses that go into owning a home? According to Whitteker, this is the total cost, and its important to not forget anything that may contribute to this number.

“All utilities and services should be considered when making your projected budget to make sure you are comfortable buying the home of interest,” Whitteker says.

Whitteker says often times people focus on getting approved for their home mortgage, but not on understanding their own budget. This second step is vital to make sure they can make the payment without causing undo financial stress.

“Things to take into consideration are, vehicle expenses including fuel and maintenance, food expenses, all utility and home services especially heating cost in the northeastern United States, medical expenses, and any other bills that you pay,” Whitteker says.

When you’re ready, compare your total cost with your net income to make sure you will be able to make the payments on the home and meet all of your other obligations. Don’t simply rely on your loan officer or mortgage broker to do this.

At Principle Home Mortgage we make sure you are considering these factors when applying for a home mortgage loan. To learn more, contact the mortgage experts at State College based Principle Home Mortgage today!