Lenders for real estate in Denver use guidelines called debt-to-income ratios to determine the maximum Colorado mortgage amount that they will give you. That ratio consists of the percentage of your gross monthly income used to pay all of your monthly debts—housing and otherwise. When you apply for a Denver home loan, the lender will determine a “front” ratio and a ‘back” ratio for your income and expenses. Before looking at the options of Denver real estate—homes in Cherry Creek, Littleton, or Aurora real estate—determine just how much house your family can afford.
A common debt-to-income ratio is 33/38. The front number is the percentage of your monthly gross income going to principal, interest, taxes, insurance, mortgage insurance, and HOA fees. The back ratio is the front ratio plus your monthly consumer debt. Guidelines vary according to loan programs. The FHA uses 29/41 and the Veterans Association uses 0/41.
You can second-guess how the mortgage industry works backwards to figure a maximum mortgage amount to offer you. They start with monthly income—only using income that can be documented with paperwork. If you are a salaried or hourly employee without bonuses, calculating your income is pretty straightforward. For others like people who earn bonuses, overtime, commissions and people who receive part-time income (seasonal employees, teachers) the calculations are a bit more complicated. These people can present tax forms or determine income over two years and divide the sum by 24 months. The self employed and those with 1099 incomes need a two-year track record of income that has been declared to the IRS. If expenses are overstated, your income will be reduced. See Schedule C of your tax returns to come up with the two years of “profit” figures, add in depreciation, take the sum and divide by 24.
After you know your monthly income, multiply it by .38. That figure is the maximum amount that a lender will allow you to spend on the combination of housing costs and monthly consumer debt using the 33/38 ratio. Now total your bills (not insurance or utilities) and subtract that amount from the previous figure. That is the maximum amount allowable for housing costs alone. Then subtract the approximate monthly amount of your foreseeable annual property taxes and homeowners insurance from your maximum monthly housing costs.
Put the above figure into the “payment” blank of a mortgage calculator along with the current fixed interest rate. If you are using a low down payment, increase the interest rate a half percent because of additional mortgage insurance required. Plunk in your actual down payment and you will see your maximum purchase price.
No one wants to be house poor and have to forego hobbies and travel that are also important aspects of their quality of life. Because of good credit, the lender may offer you more money (and larger payments) than you really want to take on. So, just know your priorities ahead of time because lenders will not compute these private aspects of your life. At no charge or obligation to the buyer, Brad Wyatt and MAC5M Mortgage, Inc. will lend their experience and knowledge to help you get on track to purchase your home. Call 1 (866) 606-MAC5 or e-mail BWyatt@MAC5M.com for expert assistance.
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