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Home Affordability FAQs
Determining exactly how much home you can comfortably afford can be tricky, but our mortgage professionals are here to help guide you on your path to homeownership. There are a few general criteria when it comes to affordability that you'll want to keep in mind:
- Your Debt-to-Income ratio, or DTI, is one of the key determining factors. The "front-end" DTI includes all of your housing expenses (principal, interest, taxes, insurance, HOA dues and mortgage insurance). The "back-end" DTI includes your installment and revolving monthly debts as well. These expenses are divided by your gross monthly income (before income taxes or insurances are deducted).
- Typically, it's best if your housing expenses don't take up more than a third of your gross income, and your total expenses don't take up more than half of your gross income. There are always exceptions and special circumstances to consider though, and our team is well-versed in finding you solutions.
- You know your scenario better than anyone else. Just because you may qualify for a certain purchase price or loan amount doesn't mean you have to spend more than you're comfortable with. Use our mortgage calculator above to work backwards from a manageable monthly payment to a purchase price that works for your budget, or let one of our mortgage professionals do the math for you!
When calculating your debt-to-income ratio, your housing expenses make up the "front-end" number and include your principal, interest, taxes, insurance — and your HOA dues and any private mortgage insurance premiums as well (if applicable).
It does not include monthly bills for things like electricity, water, sewer, or trash services, though these may seem like home-related expenses. They are important to keep in mind when figuring out what a comfortable monthly payment would be, but they are not strictly part of your loan qualification.
In addition to your down payment, there are often some finance costs associated with purchasing or refinancing a home. These may include fees for services such as title and escrow, appraisal, and county recording.
On home purchases, you'll be paying for your first year of homeowner's insurance premiums in full. If you're planning on having an escrow account for your property taxes and homeowner's insurance, you will need to have funds available to set this up so the account will be ready to pay these when they come due.
Depending on the loan program you choose, there may also be up-front fees like the VA Funding Fee, or FHA Up-Front Mortgage Insurance Premium which may be allowed to be financed into your new loan amount.
In most cases you will be able to use gifted funds (from eligible sources, of course) towards your down payment and other loan costs. The source of your gift funds will need to be documented, typically with a Gift Letter and account statements serving as the proof of funds.
The FHA considers the following eligible sources of gift funds:
- the borrower's relative
- the borrower's employer or labor union
- a close friend with a clearly defined and documented interest in the borrower
- a charitable organization
- a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families or first-time homebuyers
HUD 4155.1 5.B.4.b
Fannie Mae and Freddie Mac consider the following eligible sources of gift funds:
- a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
- a fiancé, fiancée, or domestic partner
Fannie Mae Selling Guide B3-4.3-04, Personal Gifts
- the funds are from a Related Person, and
- the funds do not have to be repaid
Freddie Mac Selling Guide 5501.3 (c)
The VA considers the following with regards to gift funds:
A gift can be provided by a donor that does not have any affiliation with the
builder, developer, real estate agent, or any other interested party to the
transaction. A gift letter must:
- specify the dollar amount of the gift,
- include the donor's statement that no repayment is expected, and
- indicate the donor's name, address, telephone number, and relationship to the borrower
VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting
Getting approved starts here.
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