Before you start searching for online house listings or start viewing homes, it’s crucial to know what you can afford. Realtors and loans officers will suggest that you get pre-approved for a mortgage loan by a lender or mortgage broker.
Lenders use a simple formula, referred to as your debt-to-income ratio, to determine the price range in which you should be shopping. This involves taking all of your recurring monthly debts, i.e. monthly rent, loans for any property you own, property tax, heat, car loans/leases, personal loans or lines of credit, credit cards, student loans or any other loans, measured against your monthly gross income – with the result not exceeding 32 percent.
It is very important not to increase this ratio during the period between receiving your letter of pre-qualification and the final closing date on your new home. Buying or leasing a new car with an increase in monthly payments or any other large purchase demanding an additional loan, could have negative last minute consequences and affect your ability to finalize the purchase.