How Much Can I Qualify For or Borrow When Buying A Home?
There are many misconceptions about qualifying criteria and guidelines in general, but even more so about how mortgage lenders determine a borrowers maximum qualifying amount.
Who Decides How Much I Can Afford or Qualify for?
Many people have an image in their head of a bitter, old, jealous, grumpy lady in the underwriting department sitting in a cubicle, with a cigarette dangling from her lip, judging you based on your bank statements and credit score, while manually reviewing your loan application and 150 pages of documentation (or is that just me?)
I can assure you, that is not how things are done…..at least not with my mortgage company.
The reality is that a borrowers max qualifying loan amount is often determined by a complex software program that accounts for many variables when finding your max qualifying amount.
Government Sponsored Entities like Fannie Mae (Desktop Underwriter=DU), Freddie Mac (Loan Prospector=LP), and government agencies FHA (Total Scorecard), VA, and USDA (GUS) all have their own proprietary automated desktop underwriting software programs that lenders use for qualifying and approving borrowers.
Automated Underwriting Approvals = Higher Loan Amounts
These DU/LP automated software approval programs attempt to measure risk and give recommendations on qualifying status like Approve/Eligible, Approve/Ineligible, Refer With Caution, Accept, Caution etc..
The key to accurate results is making sure the correct data (income) is input into the automated program because garbage in equals garbage out, right? The program can easily be tricked to giving a false approval, which will be caught further along in the file review process.
If your loan officer is not calculating your income like the underwriter does and the guidelines require, which happens more often that you wold want to know, you could be out making offers on homes you CAN’T qualify for and are actually WRONGLY PRE-APPROVED!
Manual Underwrite Approvals = Lower Loan Amounts
Lenders can approve loans ‘manually’ in what’s called a Manual Underwrite if a borrowers file has credit disputes or receives a Refer With Caution/Ineligible finding by the AUS. That’s when an actual underwriter overrides the software program and makes the decision themselves which then results in the lender taking on more liability.
Because a manually underwritten loan carries more risk for a lender, qualifying requirements are more restrictive and require lower DTI ratios, but will often allow for other ‘common sense’ exceptions to get a loan approved.
Most home buyer assistance programs like CalPlusFHA, CalPlus w/ ZIP, CHDAP, Platinum, ACCESS will impose lower DTI ratios of 45% or 43% even though FHA will allow approval up to 50%-55% DTI ratio.
DTI Ratio Determines How Much You Can Qualify For
Regardless if your loan is being approved by an automated desktop software program or a grumpy old underwriting lady doing a manual underwrite (just kidding), DTI ratio still rules the day in determining how much you qualify for.
DTI ratio is a simple math calculation to help quantify how of a borrowers income is being used to pay their monthly liabilities.
But wait……there are two DTI ratios that guidelines must account for.
a) Front End or Housing Ratio:
- Manual underwrite guidelines limit it to 29-31% of your gross qualifying income
- Automated underwriting guidelines often allow for much higher ratios
- FHA can allow up to 46.99%
- Conventional (Fannie Mae/Freddie Mac) may allow up to 45%
- VA – 46.99%?
- Calculated by dividing the estimated monthly mortgage PITI payment by the gross monthly qualifying income
b) Back End or Total Debt Ratio:
- Manual underwriting guidelines limit it to 43% of your gross monthly income
- Automated underwriting guidelines often allow much higher ratios
- FHA can allow up to 55% with compensating factors
- Conventional may allow Fannie Mae DU up to 45% and Freddie Mac LP between to 45%-50%
- VA – highest I have seen is 60%, but Residual Income is also a qualifying factor on VA loans.
- Divide the estimated house payment plus all consumer debt by the gross monthly income
MUST KNOW ==> 3 Different Types of Mortgage Pre-Approvals
Calculating Correct Qualifying Income is Critical
If trying to figure out yourself how much you qualify for, don’t assume the income you think should counts is the same way the guidelines calculate your income.
Lenders must comply with the government mandated ability to repay qualified mortgage regulations for the GSE’s Fannie Mae, Freddie Mac, FHA/HUD, VA, USDA to ensure they don’t allow a buyer to qualify for more than they think is reasonable (thank your elected officials for knowing better than you).
If a borrower is paid hourly, most likely a two year average will have to be used, just like when counting any overtime, bonus, or commission income.
And don’t forget a two year work history is usually required, unless you have special circumstances of re-entering the workforce or recently graduated from college/trade school.
Additional Variables That Impact Qualifying Amount:
- Income Tax Deductions – Most common are deductions like 2106 unreimbursed expenses or Schedule C business losses (think MLM’s). What’s scary is many people claim they aren’t even aware they have these on taxes.
- Property Taxes – if property taxes/mello roos/special assessments are higher than what was used for pre-qualifying, that will increase the DTI ratio and may reduce how much a borrower qualifies for.
- HOA Dues/Fees – if you were pre-approved with no HOA fees and the home you picked out has HOA fees, that too will increase the DTI ratio. This is especially a concern when looking to purchase a condo.
- Child/Spousal Support – if you pay it, subtract that amount from your monthly average qualifying income (and yes, if you receive this, it may be eligible to count as qualifying income).
- Credit Scores – The automated underwriting approval system reads your credit score and history (foreclosures, short sales, BK’s, collections) and that too can impact how much it will allow you to qualify for.
- Payment Shock – If you pay $1,000 in rent now, have or show little ability to save money, yet have the income to qualify for a mortgage with a $2,500/month payment, how will it be possible for you to find $1,500 each month to make the mortgage payment? Stop buying drugs or quit gambling? Just kidding – sort of.
- Loan-to-Value (LTV) – Borrowers can usually qualify with higher DTI ratios if they have larger down payments or more equity in the home.
I’ve even seen local lenders purposely underestimate a lower property tax rate at 1.25% in order to make it look like their total payment will be lower to convince you to work with them….then they play dumb and surprise you with higher payment after it’s too late and you are already in escrow.
If you want an accurate and exact dollar amount you qualify for and want to explore multiple loan options when buying or refinancing, contact me or call 951-215-6119. If I can’t help you for some reason, I’ll refer you to someone who can.