How Much Do I Qualify For?
With Hawaii’s skyrocketing home prices, the question on everyone mind is if they will qualify for that higher loan amount. That’s why the question I am asked the most frequently is “How Much Do I Qualify For?”
It always brings a smile to my face and a frown to my forehead when I get a call from a potential client wishing to spout off numbers believing that I have some magic calculator that will shoot out accurate information based on what was just rambled off to me. Calculating one’s debt-to-income ratio is simple, yet complex. In fact, a majority of those working in the mortgage industry itself regularly err when doing these calculations. That is why I never recommend a client do their own calculations, nor do I play with numbers over the phone. The worst outcome is believing someone has sufficient income, only to find a mistake and the whole transaction blows up. It may be even more tragic to have someone turned away for not having sufficient income, when in fact they really do.
Calculating an applicant’s income is only one factor in the equation. A critical factor often overlooked is the monthly expenses of the subject property. Condos have monthly HOA fees as just one example. That expense, averaging now days of almost of $1,000 per month will severely reduce the maximum amount you qualify for.
To help illustrate how much income it will take to qualify, I though it fun and informative to use the newly published Oahu Median Home Price of $985,000 and $460,000 for condos. The information below is based on the transaction for a primary residence.
For the Single-Family Home, this is how the carrying costs were calculated:
Purchase Price: $985,000
Down Payment: $162,625 (16.5%)
Loan Amount: $822,375 (maximum conforming loan limit)
Credit Score: 745
Interest Rate: 2.750% / APR 2.778%
Points: 0.000
Using a maximum debt-to-income ratio of 45%, in order to qualify for the above mortgage, you would need to have income of:
$8,548 if you have no other debt.
$9,659 if you have a $500 monthly auto loan payment.
$10,214 if you have the auto loan, plus credit card debt with a monthly minimum payment of $250.
$10,770 if your debts include the auto loan, the credit card debt, and $250 in monthly student loans.
For the Condo, this is how the carrying costs were calculated:
Purchase Price: $460,000
Down Payment: $46,000 (10%)
Loan Amount: $414,000
Credit Score: 745
Interest Rate: 2.940% / APR 3.048%
Points: 0.000
Using a maximum debt-to-income ratio of 45%, in order to qualify for the above mortgage, you would need to have income of:
$5,905 if you have no other debt.
$7,016 if you have a $500 monthly auto loan payment.
$7,571 if you have the auto loan, plus credit card debt with a monthly minimum payment of $250.
$8,127 if your debts include the auto loan, the credit card debt, and $250 in monthly student loans.
The above illustrations are simply to show you the approximate income required in order to qualify for a mortgage loan and buy a property that falls within Oahu’s current median price points for a single-family home or condo. There are lots of variables that are too numerous to go into. Please also remember what I said at the beginning of this article: Don’t calculate your own income.
One note on debt: Your DTI, or debt-to-income ratio, is the primary determining factor for qualification purposes. Because it is a ratio, it is important to note how debt impacts the amount of income you need to qualify. In today’s newsletter we used a 45% DTI calculation. In plain terms, your debt cannot be more than 45% of your gross income. If you make $10,000 per month, your maximum liability including your housing expense cannot exceed $4,500. Because we are dealing with a ratio, for every $1 of debt you need $2.22 of income. The $500 per month auto loan in the above examples is very typical here in Hawaii. Using the 45% DTI calculation, it would require you to have $1,111 of income to cover that $500 debt.
The above is the easiest way I can explain it without writing a novel. If you still have questions on qualification, DTI, and the maximum you might qualify for, give me a call or send me an email.
