As you begin your search for that perfect Tudor style Oakland home in the hills, there is always the concern about whether or not you will qualify financially, so that you can buy it.  This is not uncommon concern, and below are some tips on how to analyze where you are financially, and get a sense of just "how much home" you will be able to afford.  While it is not the final say, and there are many more elements involved, it will give you a general sense of what the banks will be looking for. 

Overall, the lenders are concerned about three things regarding future borrowers:

1. Credit Rating: In an earlier blog, on July 13th, I wrote a detailed blog on how a credit rating is arrived at.  But, in quick summary form, a credit rating is based on a FICO score. This is a score assigned to person by the credit industry based on five sources of information.  These five sources have different weights or percentages assigned to them, since they are not all considered equal in importance. Sources are (a.) Payment History (35%), (b.) Amounts Owed (30%), (c.) Length of Credit History (15%), (d.) How Much New Credit You Have Taken Out (10%), and, lastly, (e.) Types of Credit Used (10%).  In summary, it becomes important, as you begin you search for a new home, to determine your credit rating.  There are many websites which can assist you in doing this, so search for the best one.  In California, you should have a score in the 700 range. 

2. Front Debt to Income Ratio: This is a percentage arrived at by calculating your monthly pre-tax income vs. that amount that will be paid for your future housing costs, should you purchase the home.  Housing costs would include things like principal, interest, taxes, insurance, mortgage insurance, and homeowners association fees, if applicable.  So, if your monthly income is $12,000 a month, and your total housing costs will be $3500 per month, calculate as follows: $3500 divided by $12,000=29%. That puts you into the acceptable range for this ratio, where the top of the allowable range is 33%.

3. Back Debt to Income Ratio: This is the other half of the above ratio.  Here, you take your total housing costs determined above, and add to that your monthly consumer debt costs--your payments to credit cards, stores, etc..  Add that amount to your housing costs of $3500.  So, if your consumer debts put you up another $1100 per month, you have a total monthly debt of $4600.  To finish the final calculation considered by the bank, calculate $4600 divided by $12,000=38%.  That puts you at the top limit of the acceptable ratio, but not over.

So, sit down and run these numbers.  You will have to do it at one time or another, so do it sooner, rather than later, so that you will be totally comfortable with your financial picture before you begin your initial search for your home. Please note that these guidelines are flexible, and do depend on your entire financial situation, but if you assume these to be the basic format, you will have a pretty good basis from which to plan. 

Posted by Bruce Wagg on


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