Your Mortgage : Estimate Loan Ability on Your Own
Do you break out in a cold sweat at the thought of sitting down with a lender to see how big a loan you can get? Do you tremble when you think about laying out all your financial dealings and credit problems in front of a loan officer you have never met?
And wouldn’t it be nice if you could just sit down in the privacy of your own home and figure out how much you could borrow by yourself?
Well, you can. And although “prequalifying” yourself is no substitute for having a lender do it for you, it will at least give you a ballpark idea of how much home you can afford.
“I don’t really know why, but some people just don’t like talking with lenders until they absolutely have to,” said Michael Graves, vice president of American Residential Mortgage Corp. in San Diego.
“If you do a few simple calculations first, you can get a pretty good idea of how much you can borrow without having to visit a lender.”
First, Graves said, you need to figure out how much you earn on an annual basis. Include your salary, as well as any bonuses or commissions you might get.
“Also, don’t forget to include any alimony or child support you collect,” added Gloria Shulman, a mortgage broker and president of Crestview Financial Group in Beverly Hills. “You can count it as income, which can help you get a bigger loan.”
Once you’ve calculated your annual earnings, divide the figure by 12 to get an average of how much you gross each month.
Here’s where you need to know a little about “ratios.” Every lender uses two ratios when calculating how much you can borrow. One is commonly called the “front-end” ratio and the second is often called the “back-end” ratio.
The front-end ratio reflects the percentage of your gross income that will go toward housing-related expenses. As a general rule, the lender will allow you to devote up to 28% of your earnings toward your “PITI”--principal, interest, property taxes and insurance.
The back-end ratio reflects how much of your gross monthly pay would be eaten up by your housing payments and all your other installment debt--auto and student loans, minimum payments on your credit cards and the like.
Generally, your back-end ratio can’t top 36% of your monthly earnings. So, if you earn an average $3,000 a month, you’ll be allowed to spend up to $840 a month ($3,000 x .28 = $840) on your housing as long as your overall monthly debt doesn’t top $1,080 ($3,000 x .36 = $1,080).
Once you’ve estimated how much you can pay based on these ratios, you need two more pieces of information to get a ballpark estimate of how much money you can borrow.
First, you need to find out what kind of interest rates are being charged by lenders in your area. You can do this by calling up a few banks or savings and loans, or you can usually find the information in the Business or Real Estate section of your newspaper.
You’ll find a chart showing the average rates being charged by lenders in various parts of the country on this page every Sunday. Another chart, which lists the rates being charged by 20 big Southland lenders, appears every Saturday on Page 3 of the Business section.
The final piece to the borrowing puzzle is a loan-amortization book that shows how much it costs each month to pay back a loan based on various interest-rate levels. You can purchase one for about $5 from most bookstores.
Let’s say you find that local lenders are charging 9 1/2% on their 30-year, fixed-rate loans. Since you make $3,000 a month, you have already determined that you can devote $840 toward your monthly housing expenses.
Open your loan-amortization book to the table that shows how much you’d have to pay each month to amortize--in other words, “pay off”--a 9 1/2% loan. Running your finger down the “30-year” column, you’ll see that an $840 monthly payment will allow you to get a $100,000 loan.
If you live in a high-cost housing state such as California, a $100,000 loan might not seem like much. But take heart: Many lenders use ratios that are higher than the 28/36 standard, especially if you’re willing to take an adjustable-rate mortgage instead of a fixed-rate loan.
“Most lenders have some flexibility when it comes to ratios,” said Robert J. Engelstad, a mortgage expert with the Federal National Mortgage Assn.
“They’re usually able to raise their ratios if you’ve got a really good credit record, you’re moving up the career ladder or you’ve consistently made high rent payments.”
AVERAGE RATES FOR RESIDENTIAL MORTGAGES
Average rates for residential mortgages as of May 10, 1991.
Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.27% 9.59% 9.44% 7.25% 7.58% California 9.53 9.84 9.69 7.79 7.72 Connecticut 9.29 9.59 9.46 7.10 7.47 Wash. D.C. 9.14 9.48 9.33 7.04 7.37 Florida 9.24 9.60 9.43 7.23 7.60 Mass. 9.24 9.54 9.40 7.27 7.77 New Jersey 9.24 9.55 9.40 7.28 7.79 N.Y. Metro 9.33 9.63 9.49 7.28 7.69 New York 9.44 9.72 9.59 7.35 7.68 N.Y. Co-ops 9.58 9.90 9.80 7.75 8.13 Pa. 9.04 9.39 9.22 7.07 7.30 Texas 9.07 9.44 9.26 7.00 7.21
SOURCE: HSH Associates, Butler, N.J.
