Having made the decision to purchase, the next step is to determine how much you can afford and how much you choose to spend. Buyers may choose to confer with their C.P.A. and/or investment advisor on this issue.
Unless an offer is “All Cash”, having a letter of “Pre-Qualificaion” or better yet, “Pre-Approval” is essential to have an offer considered seriously.
A lender will consider three main factors:
- Income and debt. This will determine how much a buyer can afford per month for Principle, Interest, Taxes, Insurance (PITI).
- How much money a buyer has for a down payment and closing costs.
- A buyer’s credit history.
Some lender concepts:
- Loan-To-Value (or LTV): This represents the loan as a percentage of the purchase price. If you are purchasing a property for $1,000,000 and you get a loan for $800,000, then you have a LTV of 80%. The higher the LTV, the more difficult it is to obtain the loan because your lender will place tighter restrictions on the three factors listed above.
- Housing Ratio: This represents your total housing expenses, Principle, Interest, Taxes, Insurance (PITI), divided by your gross monthly income. Lenders will request proof of your income through tax documents.
- Debt Ratio: This represents your total monthly obligations for your property, PITI, plus your monthly payments on your debt. Debt includes for example, student loans, auto loans, alimony/child support.
To facilitate communications with lenders and to expedite the price, we recommend that a buyer’s first step be to fill out a Uniform Loan Application ( Sample URLA ). The lender will then pre-qualify you for a range and discuss loan options and rates, closing costs, and closing timing.
We encourage our buyers to shop around to find the best rates, but it is also important to find someone who is well qualified, trustworthy, and able to fulfill their promises. We have several lenders and mortgage brokers to recommend.