How Much Can I Borrow for a Mortgage?

                                                                                         

"How much can I borrow for a mortgage?" is asked by almost everyone wanting to buy a house or homeowner interested in refinancing. In light of recent changes in the mortgage industry that have eliminated almost every easy-qualifying loan program, this question has taken on even more importance.

The two largest categories of mortgages are Conventional and FHA. Conventional loans have guidelines set by Fannie Mae and Freddie Mac. HUD, the department of Housing and Urban Development, determines FHA's guidelines. In general, Conventional loans are harder to qualify for because they require larger down payments, higher income and better credit. However, the interest rates are the absolute lowest.

On the other hand, FHA loans are designed to give more flexibility and are easier to qualify for since they require smaller down payments, less income and lower credit. FHA interest rates are typically slightly higher than Conventional rates.

Conventional and FHA both have qualifying ratios calculated from a borrower's income and debts. There are two ratios, the front or housing ratio and the back or debt ratio. The housing ratio is calculated by taking the proposed monthly payment of the new mortgage and dividing it by the gross monthly income before taxes.

The debt ratio is calculated by taking the proposed monthly payment of the new mortgage and adding all other monthly debts and then dividing the sum by the gross monthly income before taxes. Monthly debts considered are any consumer debt such as auto loans, credit card payments, personal loans, student loans, and child support or alimony paid. Monthly obligations such as insurance and utilities are not included in this ratio.

Once calculated, the ratios give figures that tell what percent of a borrower's income will be devoted towards paying the mortgage payment and what percent will be needed to pay the mortgage payment and all other debts combined.

FHA loans have qualifying ratios of 29% for the housing ratio and 41% for the debt ratio. This means the proposed mortgage payment should be 29% or less and the proposed mortgage payment plus all other monthly obligations should be 41% or less than the gross monthly income.

Conventional loans have two different sets of qualifying ratios that depend on the loan to value ratio (LTV). The LTV is determined by dividing the loan amount by the purchase price or the appraised value, whichever is lower. For example, on a refinance, a loan amount of $180,000 on a house with an appraised value of $200,000 would equate to a LTV of 90%.

If the LTV is higher than 90% on a Conventional loan, the housing ratio is 28% and the debt ratio is 36%. When the LTV is 90% or less, the housing ratio increases to 33% and the debt ratio increases to 38%.

Additionally, when qualifying for a mortgage, other factors come in to consideration such as credit history, employment history, amount of down payment, amount or savings left after the down payment and the payment shock, or the increase in a borrower's monthly housing expense. Depending on the situation, these factors can grant flexibility to increase the qualifying ratios. Consult with a loan officer or an online mortgage calculator to help determine what you may or may not qualify for.

About the author:
Mike Sweeney is the founder of http://www.LionSaves.com , a leading mortgage refinance calculator that focuses on consolidating debt and gives anonymous quotes.

Article Source: http://www.Free-Articles-Zone.com