Step
Two - Working Backward
Once you have calculated your monthly income,
multiply it by the back ratio for your particular loan. For
generic purposes, it is fairly easy to work with thirty-eight. Take
38% of your monthly income or multiply it by .38. That
tells you the maximum the lender wants you to spend on
your housing costs and monthly consumer debt combined.
Now get out your bills and total them up
to determine what you spend monthly on debt. Do not
include your auto insurance or your utilities. Just
creditors. For credit cards, use the minimum required
monthly payment unless it is less than ten dollars. The
rest should be fairly straightforward.
Deduct that amount from the total the lender
wants you to spend on housing costs and consumer debt combined. Now
you know the maximum the lender wants you to spend for
housing costs, unless the figure is greater than 33% of
your monthly income (there are exceptions, of course).
Step Three - a Little
Guesswork
The next step requires a little guesswork. If
you have a vague idea of what price you might qualify for,
you can estimate what your annual property taxes and homeowners
insurance might cost. From there, you can easily
calculate the monthly equivalent. Subtract those
figures from your maximum monthly housing costs total.
If you are buying a condominium (or an area
with HOA fees), subtract out an approximate figure to cover
homeowners association fees. What you are left with is
your maximum principal and interest payment.
The Final Step - Almost
Now you have to go to a mortgage calculator
(click
here) and plug in some numbers. In
the "payment" area, put the figure you just calculated. Plug
in the current fixed interest rate. If you are putting
less than twenty percent down, add a half percent to the
rate to allow for charges you will pay for mortgage insurance.
Hit the calculate button and you should have
your maximum mortgage amount. Add your down payment
and you know your maximum purchase price.
Maybe. You may have to do some fine-tuning
to zero in on the exact figure. Plus, lenders know
how to "stretch" a client a bit higher if they
need it.
Advice
If the figure is less than you expected (or
need), lenders know programs that will help "boost" you
higher in qualifying. Plus, they will do what you
just did for free, they are much more experienced at the
various nuances involved, and you will have no obligation
to use them as your lender.
All you have to do is pick up the yellow
pages and a phone.