Your local bank or mortgage company can usually pre-qualify you; this means that you give them all your financial information and they give you a letter showing how big a mortgage you can likely afford. The service is usually free of charge and is a very useful tool when it comes time to make your bid. In terms of affordability, most lenders use two ratios when determining how much money to lend.

The general rule of thumb is their total housing costs (mortgage payments and real estate taxes, homeowners insurance, and private mortgage insurance, if applicable) cannot be more than 28% of your combined gross monthly income from all sources. For monthly income you can include alimony and child support, but remember that you will be asked to show proof of two months payments. Ohio residents should be prepared to follow through with all of their document gathering long before they step into the bank’s office.

I know a friend who lived in Strongsville Ohio and went to the bank looking for a mortgage qualification and didn’t have a clue on where he stood with his documentation, his credit rating, and this FICO score. This is something you really need to avoid when you go to qualify for a mortgage and Ohio. That said let’s move on.

In addition to the 28% ratio, there’s another ratio to worry about. Add your installment debt payments, student loans, and any other legal obligations such as alimony and child support to your proposed housing costs. This total cannot be more than 33 to 36% of your total income, depending on how large a down payment and mortgage plan you have. Banks will sometimes allow some percentage point flexibility in the ratios if you have other things working for you. For example, good credit or borrowing less than 90% of the House value. These rules are a little more strict than when I first started buying houses in Ohio back in 1981, largely because the real estate industry has learned from the foreclosures in the late 1980s that a tighter rein was needed. You always have to be asking yourself “what size mortgage payment cannot afford?”

You want to determine the size of the mortgage you can likely qualify for long before you ever step into THE loan officers office. Percentage rules vary, so check with the local lender to find out what rules would apply to you. You must avoid the nightmare of the house hunting with a higher mortgage limit in mind that you might qualify for because you’re absolutely wasting your time.

I always encourage borrowers in Ohio to start by writing down your total monthly income before taxes. Multiply that amount by .28, and the answer is your preliminary maximum monthly mortgage payment. Then subtract the estimated monthly real estate taxes and homeowners insurance. Your total is the maximum monthly mortgage payment for which you would likely qualify. This simple calculation was provided by Betty Houston from Columbus, Ohio. She works for a major bank and has been working for major banks for over 30 years. (plug done)

Now it gets a little more complicated, because we have to take into account your other monthly debt payments, alimony/child support payments, and any other fixed payments. First, write down your current non-mortgage monthly debt payments as part of your current debt load. Do not include debts that will be repaid within the next 10 months of your current mortgage payment if you’ll be selling the property when you buy your new house. Include your current monthly legal obligations, such as alimony and child support payments and they should be held to calculate your total current monthly fixed payments. I could go on forever with calculations and spreadsheets but I will avoid that today.

You may be wondering why lenders go to all the trouble of calculating different ratios. The reason is that so many of us are loaded down with credit card debt, student loans, and car payments when we go to apply for a mortgage.

Let’s say your household income is $3200 a month and real estate taxes and house insurance will run $200 a month. If the lender just looked of these factors to clear up the amount to lend you, you will have a five year mortgage that has $804 dollar monthly payment. But what if you already have debts and other fixed payments such as child support that eat up $800 of your monthly income? If the lender didn’t take those in the consideration, you both would get in a financial jam rather quickly because every month you would have to shell out over half of your income without even counting your income taxes – before you would have even a penny to buy food and other basic necessities. You would end up defaulting on the mortgage, and the lender would get saddled with a house to sell.

The payment amount you just came up with is not cast in stone; these are guidelines that lenders use. Some lenders are stricter than others and a lot can depend on your own set of financial circumstances. One client with a good credit history but a new business and 10% down payment can face much stricter mortgage qualification rules that another that has 30% cash to put down and has been on the same job 10 years.

If you live in Ohio presently and your looking for a property and dreaming of being a homeowner, your dreams can come true if you have a strong grasp of how banks work and how lenders process your application. I had a client in Mansfield Ohio who was moving to Dayton Ohio but in the very end ended up moving to Delaware Ohio. The stops and starts of the relocation cost a lot of money because they were not prepared for the bank was going to say. As it turned out when they went to the bank to apply for there mortgage they could not pre-qualify for nearly the amount they expect to qualify for. This was very unfortunate because they had already put an offer in a house in Mansfield. They ended up losing their deposit on the House in Mansfield for $10,000, and all of the loss of hours at work were devastating. My calculation is that this client lost over $25,000 by the time the deal was done and they were in to their final home in Dayton Ohio. You can’t let this happen to you.

Do yourself a big favor and take heed of the advice in this article and you could save yourself thousands of dollars and pain and anguish.

189/193 MD

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