Determine you are verifiable, established income received from all sources. This includes compensation received on a regular basis that is documented and can be proven to your mortgage lender. Most common types of documentation include pay stubs, W2, or 1099 tax forms. Other provable income may include official reports for Uber or Lyft income, regular statements from eBay or similar online accounts, and bank statements illustrating other regular income, such as rental monies received from an income-producing property that you may own.
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Non-deposited or irregular cash income received from babysitting, dog-walking or part-time “gigs” may not be considered in the calculation.
First Step:
Remember, there are more than 4 weeks to a month. Thus, if you are paid weekly: multiply your gross income from the most recent paycheck (before taxes and deductions) by 52 (weeks), then divide by 12(months). This will determine your monthly gross income. If you are paid bi-weekly (every 2 weeks), simply multiply the gross income on one check by 26 and divide by 12. Are you being paid bimonthly (2 times per month)? Simply multiply your gross by 24 and then divide by 12.
Those calculations assume a regular, fixed income. If your income includes variable overtime or commission payments, make an initial calculation using base pay only. Then, add up your overtime or commission income received over the last 6 months, and divide by 6. Add the average of your fixed income to the average of your variable income, and you will have total your gross monthly income.
For example, The median gross family income in Seattle, Washington is $100,000.00 per year. Divide this number by 52, and it breaks down to $1923.00 per week. Divide $100,000 by twelve, and you have a gross income of $8,333.33 per month. Thus, 31% of gross income would be $2583.00 per month.
Second step
Determine minimum monthly payments necessary for your existing credit cards, car payment, student loans, second home mortgage, 401(k) loan repayment, and any tax debt. These recurring, fixed payment items appearing on your credit report will be taken into consideration by your Seattle online mortgage lender in calculating the maximum loan available for you. Add the total of those payments.
Once you have the payment total of your monthly, fixed debt items, divide that amount by your monthly gross income. If you have $800.00 in fixed monthly expenses and divide by $8333.33, you can anticipate those expenses to equal 9.6% of your monthly income.
Once you have your figures calculated, enter them into the mortgage calculator.
Third step
Determine your debt to income ratio (DTI). DTI is one of the biggest factors used by underwriters in approving a home loan. Most lenders will approve a mortgage for a borrower who has a debt-to-income ratio of 43% or less. However, there exist some federally underwritten programs that may deviate from this calculation.
Using our example above, an individual with a home loan payment of 31% of gross income, and expenses at 9.6%, would have a debt to income ratio of 40.6% and would be a viable candidate for approval of a home loan.
If your debt-to-income ratio is a little high, consider paying down credit cards or other loans before you apply for a mortgage. This will ensure that you are a viable candidate for the best financing rates and loan programs available.
Budgeting for your home and lifestyle
Approval guidelines are based on average common expenses and determine maximum approved loan and payment amounts. If you are frugal, carry little debt, and are more of a homebody, maximum guidelines should fit your lifestyle. However, if your entertainment and dining budget is on the higher end, you may want to consider a home loan with monthly payments lower than the maximum approved amount.
Though not necessarily included in your official mortgage approval calculation, it is important to track all other monthly bills and subscriptions. Most importantly, all savvy financial planners advise budgeting a minimum, payment of 10% of your gross income to a savings plan.
Other necessary fixed expenses to consider include: federal & state income taxes, health & dental insurance, children & dependent expenses, cell phone, cable & internet, gas & electric, clothing, homeowner’s association fees, and car insurance.
Be sure to also consider variable, but recurring expenses, such as groceries & cleaning supplies, haircuts, dining out, gym membership, Netflix, daily coffee purchases, uncovered medical expenses, vacation savings, birthday & Christmas gifts, veterinary & food expenses for your pets, and any major upcoming life events (like participation in a wedding). Variable expenses can be difficult to calculate. Experts recommend keeping a journal or spreadsheet to track this spending and revisit the list regularly to see where reductions can be made.
Other items to consider
Property taxes change every year the past few years have seen an abnormally large increase in tax rates in Seattle due to past legislation. The 2019 property tax bill will not reflect much of an increase. The average tax bill in King County for 2019 will be approximately 1% of the value of the home. Thus, a home with a value of $250,000 will see an annual property tax bill of $2500. Divide that number by 12 (months), and the monthly tax liability is $208.34.
Certain buyers are eligible for property tax deductions or exemptions. If you are disabled, elderly, or the widow(er) of a veteran, be sure to discuss the tax breaks with your favourite Seattle online mortgage lender.
Also, keep in mind that certain utility bills are higher in a larger house. If your current living situation is a one-bedroom apartment in a high-rise, chances are you pay very low heating and electric bills. When considering your home purchase, keep in mind that the larger the square footage, the larger the utility bills will become.
Monthly mortgage payment guidelines are used to calculate generally how much mortgage payment an individual can afford. However, they do not anticipate for all individual spending habits. Make a list of all possible expenses, fixed and variable, and prioritize voluntary spending categories. Are those expenses absolutely necessary? Be realistic when assigning a value to entertainment expenses.
Consider alternatives, such as dining at home or avoiding your favourite clothing store. It is possible to be a homeowner and still enjoy your life! Check out all of your Seattle home financing options at www.sammamishmortgage.com, and follow their simple steps for preapproval.
