Before you take the first step to buying a home – talking with a Michigan mortgage lender – you have to look at your personal finances.  It’s important to understand your income to debt ratio.  How much you earn versus how much you owe is a major deciding factor in how much a mortgage lender or banker will let you borrow.

The first step is determining your gross income.

Your gross monthly income should include your regular or recurring income that you’re able to document.  If there is no documentation for income, or it doesn’t show up on your tax return, then you cannot use it to qualify for a loan.  Other items such as alimony or lottery winnings (unearned income) can be used to help qualify.

Income producing assets including stocks or even real estate can be estimated and used in the income vs. debt calculation.  If you’re not sure what to use, then you can talk with a financial advisor or even a Michigan mortgage lender about what is included.

The next step is reviewing your current debt load.

Your monthly debt includes all obligations that you have to pay on a 30 day cycle.  This includes credit cards, installment loans, personal debts, child support, etc.  Revolving debts like credit cards are calculated using the minimum payment required.  Installment debts use the required monthly payment.  You can ignore those debts that are scheduled to be paid off within the next six months and leave them out of the calculation.  Adding these up shows you your total monthly debt obligation.

Moving forward to get a loan with a Michigan Mortgage Lender

Just about every lender or banking institution works the same way; they don’t want you to take out a loan that will overload you and make it impossible for you to repay.  While each lender is different in terms of their formula, here’s a good example of how your ability to repay is calculated.

For the average person, housing expenses that include tax payments and insurance shouldn’t exceed 28% of your gross monthly income.  If it does, there’s a ceiling of around 36% where most applications would be denied.  It’s best to stay around 28% or lower so that you can move some of your monthly income toward savings for emergencies.

Ultimately it depends on your individual situation.  There is some flexibility involved.  For example:  If you can buy a home while borrowing less and paying more of a down payment, the qualifying ratios become less stringent.  There are also a lot of lenders out there.  If a big bank turns you down, you can always work directly with a Michigan mortgage lender that may have less-strict guidelines for getting you the mortgage you’re looking for.