Base Loan Decisions on Finances, Not the Lender

Oct 9th, 2007 @ 7:31 PM by MortgageMentor

Borrowers who want to get a mortgage have always approved–or not– according to a cut-and dried formula. The lender adds up your PITI (that’s your monthly mortgage payment, along with the taxes and insurance) and compares it to your gross pay. That number should not be greater than 28 percent. Then you total all your debts, including the possible mortgage and make sure it does not exceed 36 percent. If it works, you’re in. But these days, buyers should be a lot more careful with their purchase, especially first-time buyers.

Figuring your Payment

Before you decide whether to purchase a particular property, you should first find out what types of loans are available and what your monthly payment would be. There are plenty of online mortgage calculators that will help you add up your monthly payment based on the amount of the loan, length of the loan, and the interest rate. When using these, make sure to add in the extra for taxes and insurance–numbers that wouldn’t normally be included in the figure.

Also, if the mortgage has an adjustable rate, it might start with a low rate but later it can increase sharply–sometimes adding hundreds to your monthly payment. If you’re using a calculator that only shows fixed-rate figures, you could be in for an ugly surprise. In this case, ask the lender to supply you with both worst-case and best-case scenarios–and give credence to both. Too often, borrowers assume that the most positive case is the one that will apply to them.

Study Your Financial Situation

After finding out the monthly payment on the home, determine whether you should take out the home loan by comparing the possible mortgage to the amount you pay now for your rental. Is it close to the same amount? Is it more? How much more? Will your budget allow you to pay the difference month after month?

Also consider how your finances might change in the near future. Do you have a child ready to head off to college? Is there a chance your job, or your spouse’s job, could change significantly?

All of these factors are a part of the decision as to whether to take out a home loan. It is important to consider each item carefully, and not take out the total amount that you qualify for just because the lender says you can. Learning about mortgages can seem overwhelming, but asking all these questions now can prevent problems in the future.