How much a borrower can qualify for when buying a home in Bend, Oregon is primarily determined by the debt-to-income (DTI) ratio and the loan program used to finance the home purchase.
DTI ratio is a measurement, expressed as a percentage, of your eligible gross income that goes towards paying the housing principal, interest, taxes and insurance plus other monthly liabilities like auto loans, credit cards, student loans etc..
For example, if a buyer has income of $6,000/month and $2,600/month in liabilities (monthly debt payments including the new house payment), simply do the math to calculate your DTI ratio.
For example: $2,600 ÷ $6,000 = 43% DTI Ratio
If you aren’t already working with a lender a “How much house can I afford” mortgage calculator is a great tool to get you on your way to figuring out how much you might qualify for. Be as accurate as you can with your numbers so you don’t end up with “garbage in – garbage out” results.
Each loan program (like FHA, VA, USDA, Conventional) has it’s own maximum DTI ratio limit like 43%, 45%, and some go to 50% or 56%. A high DTI ratio of 50%-56% indicates how much of the gross income is being used to satisfy debt and how little will be left to pay bills like utilities, gas for your car and going out to dinner or a movie.
Having a DTI Ratio at 43% or lower is now the industry standard as a result of the Qualified Mortgage and Ability to Repay regulations recently passed by the government.
Keep in mind while going through this process that your debt-to-income is extremely important in determining how much you can borrow. However, what that number ends up being depends on how good you, as the borrower, are at telling your loan officer about all of your income and being able to support it with documentation.
Go through your most recent three bank statements and look closely at your deposits. Are there deposits that happen every month but aren’t part of your salary? You may be able to use those to bolster your income. If you receive cash payments on a regular basis but don’t deposit them to the bank you may not be able to use that money to qualify even if you have a contract in place that says you are owed the money. Underwriters like a paper trail for all your money, especially your income. This is why it’s important for lenders to get all the details before the borrower can expect to see an accurate dollar amount they qualify for.
Mortgage lending is not rocket science, but it can get uneccessarily complicated when borrowers start making assumptions or even guesses about variables involved in determining the debt-to-income ratio and how much a borrower qualifies for.
Some lenders will be more conservative in their initial estimate than others lenders. I feel this is a prudent way to approach a pre-approval because there is nothing worse than being told by a lender that you qualify for a mortgage of X amount only to find out two weeks later when your offer has been accepted, inspection completed and appraisal returned that you don’t qualify for that amount. Now you can’t buy the house you are in contract on. Frustrating to say the least.
The key to figuring out exactly how much you qualify for is dependent on the questions a loan officer asks when gathering information as well as the completeness and accuracy of the information the loan officer receives in answer to those questions.
Here is a brief list of variables that impact how much a person qualifies for:
My advice is that you work closely with an experienced, reputable, local lender on your pre-approval and have him/her explain how they came to your qualifying amount just to make sure they are using an accurate, monthly qualifying income and using reasonable assumptions for the variables listed above that can’t be accurately determined so early in the home buying process.
Once you have your qualifying amount in order so you know how much house you can afford and a pre-approval in hand, you’ll have more confidence when making offers and negotiating sales price.
Here is a short video that offers more technical terms and ratios and shows you how to do the math yourself to calculate your ratios.