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What Lenders Think You Can Afford

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Before going out to house hunt, experts say you should shop lenders and get an estimate on how much they expect to be able to lend you. This is called prequalification. It is simply an estimate on what the lenders think you could afford, but beware. Lenders (and real estate agents) will typically tell you that you can afford a little more than you can "comfortably" afford. They want you to stretch your budget to the limit and get the biggest, most expensive house at the top of your price range. If they say you can borrow $250,000 they want you to use every last penny, when in reality you might want to look for something in a less expensive bracket. Lenders often look at four main factors to determine how much they think you can afford:

• Monthly gross income (your monthly mortgage payment, including taxes and insurance should not be more than 28% of your monthly gross income, this is your "housing expense ratio")
• Outstanding debts and monthly bills (should not exceed more than 36% of monthly gross income, this is your "debt-to-income ratio")
• Credit history (to determine how responsible you are at paying loans back)
• Available cash for a down payment and closing cost (usually 10-20% of the house price)

The type of mortgage you want and the current interest rates also factor into their decision. With this information they will make you an offer that they feel you will be able to repay.

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