Getting a mortgage

The process

Getting your finances in order is one of the most important steps when buying a home. Good credit means a better loan with a better interest rate, which means you can afford more house. The first step is to make sure your credit is in order and then to make a budget based on your income to debt ratio. The lender (a broker or bank loan officer) will then take you through the pre-approval process, and then depending on what you can afford, will give you a loan. There are many types of loans – Adjustable rate, FHA, and more. It’s up to you to determine which type of loan is best for you.

How much can you afford?

Monthly gross income, credit, credit history, and the down payment amount are all factors in how much you will qualify for. To understand how much you can afford, many use what’s called a debt-to-income ratio. In general, according to Bankrate.com, your monthly mortgage payment, including principal, interest and taxes should not exceed 28% of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense. This is often called the front-end ratio.

The back-end ratio includes things such as car payments, previous debt, child support, credit cards, student loans and condo fees. This number should not exceed 36% of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.