While what I do on the realtor side of things is important, quite honestly, the financing is the pivotal part of any successful sale (unless you have a bag of cash 🙂 Lender’s use what is called a Debt To Income (DTI) ratio. Your monthly debt payments (auto loans, credit cards, student loans, etc) PLUS your new mortgage payment can be no more than 45% +/- of your gross monthly pay. The % allowed varies depending on your credit, loan type, and other factors, but 45% is a good estimation.
Here’s an example:
Gross Income = $6000/mo
x 45% = $2700 (Max DTI)
NOTE: This means your current monthly debt payments PLUS your new mortgage can be no more than $2,700/mo
Car Payment = $350/mo
Credit Card Payment = $200/mo
Student Loans = $300/mo
Total Debt Payments = $850/mo
NOTE: Monthly living expenses like cell phone, cable, etc. ARE NOT included. Only recurring DEBT payments.
Putting It All Together:
$2,700 (Max DTI)
– $850/mo (Current Debt Payments)
= $1,850 Max New Home Payment
Types Of Mortgages & Loans
Conventional: A “traditional” mortgage and is administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government). They are called “conforming” loans and in Colorado the maximum conforming loan limit is currently $417,000. Downpayments start at 3% but to avoid paying mortgage insurance and to obtain the best rate & terms borrowers need 20% down.
Jumbo: Loans that would otherwise fit conventional guidelines but are over $417,000. Downpayments are often 20% but the requirements can vary from lender to lender.
FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) which is a division of HUD (Department of Housing and Urban Development). In general they are designed for lower to middle income borrowers, many first time buyers, or those with credit score below 720. FHA loans have somewhat more relaxed qualification guidelines than conventional loans, require a lower down-payment, but are more expensive over time and have more expensive Mortgage Insurance.
VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.