A good real estate agent will advise you to get a loan consultation prior to beginning your home search. A great, real estate consultant will recommend a lender that they work with closely and that they trust to take you through the approval process and a full blown consultation to ensure that you understand exactly what your options are and what you can afford. But, what if you do not have a recommendation for a lender?
Many times when starting the pre approval process your mortgage consultant is just a voice on the phone. So how do you know that they are giving you the best information and advice?
It’s often not about what they tell you but what questions they ask you!
Many mortgage consultants start the process with the objective of determining the highest purchase price for which you qualify. This seems reasonable until you know what lenders don’t include in your qualification numbers. It is critical that a mortgage consultant start with what you think you can afford.
The first questions a lender should ask are:
• “What have you budgeted for your monthly payment for your mortgage?”
• “How much do you want to put down on your new home?”
• “What is your target price range?”
Why is this important? Loan qualification is a set formula but people don’t all live with the same lifestyle.
Lenders use a simple formula to determine your qualification. They take your monthly debts:
• New Loan Payment Principal and Interest, Taxes and insurance
• Auto Loans/Leases
• Credit Card Payments
• Installment Loans
• Student Loans
The total of this is divided into your monthly GROSS income and should not exceed 45%. There aren’t many people that budget monthly off their gross income so this calculation does not help you determine if you can afford the monthly payment each month out of your NET income. Some buyers are more conservative savers and have more taken out each month and deposited to their 401K resulting in a lower net income, not to mention variations in health care costs and tax withholding.
Lifestyle is another factor. Many families have child care and education expenses that are not considered in lender qualification. Discretionary spending can also vary between households depending on lifestyle. This is not taken into account for qualification.
So the question is not what the lender can approve you for but what can you afford!
It is important to work with a consultant that always has this in mind when working with you and approaches your specific situation. It is helpful for you to run a budget and consider your take home pay and an average of your monthly expenses. Compare the new loan payment to your current housing expense. How much more can you afford?
Start your consultation armed with this information so you can make the best decision and don’t let a mortgage consultant steer you into a home that is going to stress your budget and keep you up at night.
Working with a mortgage consultant that takes the time to understand your specific financial situation is the key to getting the right financing for the right home.
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