By HC TANNER

In my last article I explored some of the secrets to accurately calculating your income for use with online mortgage calculators. Specifically we discussed the ‘how much loan do I qualify for’ mortgage calculator.

Just a quick and simple recap: we discussed that self employment net income, commission, overtime and bonuses will be averaged over a 24 month period unless it is declining in which case the most recent 12 months will be taken into consideration or the overtime and bonus may not be considered at all. In the case of bonus and overtime income especially, your employer will need to verify that the continuance of the extra income is likely. Base employment income, be it salary or hourly over a standard workweek (usually 40 hours but less for professions like nursing) will be taken into consideration without an average. Thus raises are taken into consideration immediately and without averaging in past income at lower hourly or salary rates.

When trying to determine how much loan you qualify for it is important to be sure you have some general target of house and price you would like to buy. This is so you can have a set of reasonably accurate figures for property tax, homeowners insurance and mortgage insurance which are all part of the total housing payment that will be compared to your monthly income and measured as a percentage.

Since the amount of mortgage you qualify for is a by product of the total payment your income can support (lets say 33% of your pre-tax income), the higher the total of items like taxes and insurance the less room there is for monthly principal and interest payments and thus the lower the amount of loan you can expect to be approved for.

So let’s approach this calculation by steps.

Step 1: You probably have a particular type of house or price range in mind. Let’s start there. If you think that the home that would suit your needs will be about $250,000 we will base our calculations on that and adjust as necessary.

Step 2: We need to calculate the approximate annual property tax rate. This figure will vary not only by region but also within regions. In California we can start with a normal base rate of 1.25% annually. By taking 1.25% multiplied by the target sales price of $250,000 and divided by 12 months we arrive at a property tax figure $260.42 we can use in our initial calculation.

Step 2: Homeowners insurance is a requirement by lenders and can vary by coverage, providers, regions and particulars of the home and surrounding area. I usually estimate using a percentage of value and a conservative percentage to use for a base policy (no flood no earthquake) would be 0.40% of the purchase price per year or about $83 a month in this case. (0.40% x 250,000 = $1,000 / 12 months $83.00).

Step 3: Determine how much cash you can or want to put as a down payment. In this scenario we will assume you are a first time home buyer and putting down 3.5% and plan to use an FHA mortgage for your purchase. If you are looking at putting less than 20% down under any program you will pay some sort of mortgage insurance. Mortgage insurance is paid by you but is to protect the lender against loss should you not make payments on the home. FHA mortgage insurance is calculated as 0.90% annually of the base loan amount. If the purchase price is $250,000 and the down payment is 3.5% ($8750.00) then the base loan amount will be the difference $241,250 and the monthly mortgage insurance will be $241,250 x 0.90 = $2,171.25 / 12 months or $180.94 monthly. If the loan you are seeking is a conventional loan, then the mortgage insurance rate can vary by credit score and down payment and region. You can visit a site like http://Radian.biz. Choose BPMI — non refundable in their rate finder and fill in the remaining blanks. The rate finder will give you a monthly mortgage insurance estimate.

Step 4: If the property is a co op or a condo/town house or a Planned Unit Development, a home owners fee will likely apply and must be included in your over all housing payment for qualifying purposes. Home owners association can have benefits but they do take away some borrowing capacity.

Step 5: Calculate the amount of monthly payment you likely will be approved for. In most cases using 33% of your gross income is a safe bet although some programs will go higher with strong compensating factors. Let’s stick with the 33% here. Assuming in this case that your pre tax household income is $6,000.00 then the housing payment you would qualify for is 33% x $6,000 or $1980.00.

Step 6: Pull the property tax and insurance and home owners association figures from this total housing payment number.

So using our example:

Total Payment — $1980.00

Prop Taxes$260.42 Home Insurance $ 83.00 Mortgage Insurance$180.94 (assuming FHA) Home owners Assoc$150.00

Total Left Over

For Mortgage Payment$1305.64

You can now enter some basic data in the online mortgage calculator and reach an approximate conclusion on how much loan you qualify for.

Step 7: Enter the current interest rate (lets assume 5.5%) and the loan term (assume 30 years) and the amount of housing payment left over after taxes and insurance into the online mortgage calculator ($1,305.64). The mortgage calculator figures that the loan amount you qualify for is $229,952. If the interest rate is lower the loan amount qualified for will be higher and vice versa. You can take this figure and add your available down payment funds to arrive at an approximate housing price you should be targeting but remember as you play with the calculator and adjust the sales price, all of your figures will change as a result so you can refer back to the steps to double check your results.

For more information or comments on this article please email hugh@themortgagecity.com.

About the Author: HC Tanner is a California Mortgage Banker for a prominent National home builder and is personally responsible for over $500 million in loan origination volume. Mr. Tanner is an expert in first time home buyer financing. For information please visit Mortgage Calculator and Online Mortgage Qualifying Calculator.

Source: isnare.com

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