The most important first step in buying a house is determining what you can afford and what type of mortgage makes the most sense for you. So, it seemed a good idea to explain what is involved in qualifying for a mortgage and what some of the basic terms mean.

For starters, it is important to understand key qualifying terms like debt to income and loan to value. Debt to income is a ratio of how much you make monthly compared to what your monthly expenses are. Income is everything from W-2 and 1099 earnings to income on investment properties and investments to Social Security and pension income, and debt is the new mortgage combined with anything reported on your credit, including credit cards, mortgage payments which will not be paid off in the transaction, car payments, student loans, or any other term or revolving debt you might have. Every type of loan has different debt to income requirements, but ultimately the lower the number, the better.

Loan to value is a measure of the amount you are borrowing compared to the appraised value of the property. So, if you are putting $20,000 down on a $100,000 home, you are borrowing $80,000, which is 80% of the home’s value, and you have an 80% loan to value. This ratio helps to determine which loan types you are eligible for. The old rule of thumb that going over 80% loan to value is bad is no longer true; one of the most common loan types, the FHA loan, allows you to borrow up to 96.5%, and with a VA loan, you can borrow up to 100% of the cost of the home.

After understanding these two basic concepts, you can begin to understand how much home you can borrow. With that information, it is time to start thinking about what loan type you want to go with, such as traditional, FHA, VA, etc., and whether you want fixed or adjustable interest. Stay tuned to upcoming blog posts to learn more about these loan types and which one is best you.

If you have any questions about loan to value, debt to income, or how much you can afford to borrow, please contact me. And if you have anything to add about loan to value or debt to income calculations, please leave a comment.