You are looking for that very special Oakland home for you and your family.  As with most buyers, you may be concerned whether you will qualify financially, so that when you find your perfect home, it can be yours.  While this is a very common concern, the more you know about "how much home" you can buy, the more comfortable you will be as you begin your search.  Below, is an overview of what lenders will be looking for when they consider your loan application.  While this is not the final list of things they look at, and there are many more issues involved, below is a general overview of what is looked at by lenders:

Overall, they are concerned about three things regarding future borrowers:

1. Your Credit Rating:  Your credit rating is composed of many things, 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 that they will receive about you. 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, to give you at least a head start as to information about you that will be reviewed, you should determine your credit rating.  In California, you should have a score in the 700 range. There are many websites that can furnish you with that informtion. 

2. Front Debt to Income Ratio: This rather confusing term is easily calculated by you at home. 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, which is good news.

So, sit down and run these numbers. You are going to have to work these figures, and what they mean, at one time or another, so do it sooner, rather than later.  Once you do, you can have a sense of  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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