Wouldn’t it be great if we could tell the lender how much we think we can afford to pay for a house in Scottsdale? Unfortunately, it doesn’t work like that. In fact, although you may think you know how much you can borrow, based on how much you currently pay for housing, what the lender comes up with may be wildly different – and it’s the lender that has the final say in how much it will lend you.
Let’s take a look at just how banks and mortgage companies come up with the amount of money you’ll get to buy that home in Scottsdale.
When you make an appointment to visit a lender you’ll be asked to bring in a whole stack of documents, mainly dealing with your income and your debt. The lender’s underwriter will use these figures to determine what is known as a debt-to-income ratio (DTI) which basically tells them how much money you have to spend every month after paying your bills.
The DTI has two versions, the “front-end” and the “back-end.” The former involves taking the prospective loan’s principal, interest, taxes and insurance (PITI) and divides it by your monthly gross income. Lenders like to see this figure as no more than 28 percent of your pre-tax income.
The back-end ratio tells the lender how much of your income is consumed by debt. Auto and student loans, revolving credit and child support payments are some of the debt that is used in the calculation. You can figure this one out yourself by adding up all your recurring debt payments and dividing the sum by your monthly gross income. If the result is more than 36 percent you may have trouble getting a mortgage. Not always, though. Area median home prices have a lot to do with how high a lender will allow your back-end ratio to be. The higher the prices, the higher the allowed back-end figure. Just keep in mind that the lower you can get your DTI, the more money you can borrow.
The dreaded FICO score – it has a lot to do with not only how much you can borrow for a house but for a car, a consumer loan and even has an impact on how much you will pay for insurance,
If your credit score is too low (typically below 580) you won’t qualify for even a government-insured loan. Borrowers with the best scores, 740 or higher, not only qualify more easily for a mortgage but get better interest rates as well.
I’m happy to answer any questions you may have on buying a house in Scottsdale.