The first step to determining how much you pay for your new home is to determine how large a mortgage you qualify for according to the lender's underwriting guidelines.  There are several easy steps you can use to qualify yourself before shopping for a home.  Once you have completed qualifying yourself, it is often helpful to call the lender and review your calculations.  Before starting you should remember five basic things:

1. You should spend no more than 28-33% of your gross monthly income on principal, interest, taxes, fire insurance, flood insurance (if applicable), private mortgage insurance (if applicable) and homeowner's association fees (if applicable).

2. You should spend no more than 33-38% of our gross monthly income on the above housing expenses plus all of your other monthly debts.

3. Monthly obligations include credit cards, car loans, student loans, personal loans, alimony, child support and any loan you have co-signed that has more than 10 months remaining.

4. If you receive bonuses or overtime, you should average these items over the last two years.  They must have been consistently received during that time period and must be able to be verified as continuing in the future to be used as stable income.

5. If you are self-employed or receive commission income, you will need to have a two-year track record.  Since underwriting guidelines vary, you should discuss this with your lender.


WHAT ARE RATIOS?

Lenders use two qualifying guidelines to determine the amount of mortgage your are eligible for.  These factors are called ratios The first ratio takes into account your total housing payment; this should not exceed 28% to 33%, depending on your mortgage program.  The second ratio takes into account your total housing payment and other monthly debts; these should not exceed 33% to 38% of your monthly gross income, depending on your mortgage program.

WHAT IS PITI?

PITI is the term lenders use for your monthly housing payment.  PITI stands for Principle, Interest, Taxes, and Insurance; these make up your housing payment.  Principal is the monthly portion of our original loan balance that is paid each month to gradually reduce your loan balance.  Interest is the portion of interest you will pay monthly.  Taxes refer to your real estate taxes; lenders establish an escrow account at time of closing and each month a portion of our real estate taxes are collected so when the taxes come due there are enough funds to pay the real estate taxes.  The same is true with your fire insurance policy and flood insurance policy, if required.

There is another insurance lenders require if you make a less than 20 percent down payment; this is called private mortgage insurance (PMI or MIP).  This insurance enables the homebuyer to purchase a home with a lower down payment (5% or less) than would otherwise e acceptable to lenders.  Private mortgage insurance protects the lenders in the event the borrower fails to repay the mortgage loan.  It is not life/disability insurance for the borrower, nor does it mean that the borrower would lbe protected if the loan were not repaid.  What it does is help the lender recoup there costs from the foreclosure proceedings.