One of the most important parts of buying a home is qualifying for financing. You could find the most perfect home at a perfect price, but unless you can pay for it, it doesn’t matter. For this reason many people like to get pre-qualified or even pre-approved for a loan before finding their perfect home.

In general, obtaining a loan has become much more difficult since the housing crash. When the housing market was booming, lenders would give loans to nearly anyone, even if their credit rating was spotty or their debt-to-income ratio was bad. People who never should have qualified for loans to begin with ended up defaulting on their payments, and foreclosures flooded the market.

Now lenders have gotten stricter, to ensure that they’re lending to qualified homeowners, who can and will repay their loans. Now, lenders require that you have a debt-to-income ratio of about 28/36, but it varies based on the kind of loan you’re hoping to get. The debt-to-income ratio means that no more than 28% of your total monthly income before taxes can go towards your mortgage payment. The 36 of the ratio means that no more than 36% of your monthly income can go toward your total monthly debt, including your mortgage payment. This debt includes all loans, such as car loans, student loans and credit cards.

While a mortgage lender will tell you what they think you can afford, you should know exactly how much you’d like to spending each month on your mortgage. The lender cannot determine your monthly expenses outside of debt, so things like dining, club memberships, and entertainment are not factored into your debt-to-income ratio. You also want to make sure you can save money for retirement or an emergency savings account.

Say you earn $50,000 per year and are looking at Denver Colorado homes for sale with a $1,000 monthly mortgage payment. You will need to divide your annual income by 12 to get your monthly before tax income. From there, you simply multiply the number by 28%, giving you a maximum monthly payment of $1,166. Unless you have other loans out, you should be fine. Let’s say, however, you have a $500 car payment and a $250 student loan that you must pay each month. Since you will need to combine your mortgage payment with all other monthly debts, you will be at $1,750 debt to roughly $4,166 income, or 42% of your pre-taxed monthly income would be going straight to debt. Since you have too many other loans out, your lender will most likely only allow a $750 monthly mortgage payment or will require a higher down payment.

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