Financial Calculations

Preapproval
• In a "seller's market," many agents won't show houses before clients have preapproval letters from lenders - especially during a pandemic. Only a trusted lender can give buyers the final preapproval number based on each buyer's unique circumstances.

A prequalification takes the information provided by the borrower, assumes truthful disclosure and gives an estimate. A preapproval requires the lender to research the information provided by the borrower to ensure all the information is true and still valid. Ideally, a preapproval has gone through the underwriting process to ensure everything will move smoothly.

Unapproved buyers simply aren't prepared to make immediate offers. A properly priced house could have 30 offers in the first few days. This is business. Sellers will select buyers that are READY, willing and able to close the transaction.

• It's vital to get the final loan approval number from a trusted lender. Many variables are factored into the amount that lenders may risk at any specific time on any specific borrowers for any specific properties. Only lenders determine this, and lenders will each have different standards. The preapproved amount is the maximum allowed by a specific lender.

• It's important to shop lenders. Borrowers can have multiple "like kind" credit inquiries ("hard pulls") by mortgage lenders within a 45-day period, and those only reduce the credit score as if one inquiry was requested.

What Can I Afford?
Many financial advisers suggest the 28/36 Percent Rule for housing. This rule allows for a maximum of 28% of gross annual income for housing expenses and a maximum of 36% for total debt (8% more on top of housing). The remainder is used for food, utilities and life's essentials.

Buyers should have financial "breathing room" when determining how much debt they are willing to incur. Don't become "house poor."

The final lender-provided number includes consideration for the loan principal and interest along with insurance, taxes and often HOA fees. Lower interest rates allow buyers to get bigger, better and newer homes because less money is paid toward interest each month for 30 years.

As a rule of thumb, three times annual income is a good starting point for estimate calculations. If someone is completely debt free, a number closer to four times annual income might be possible but not suggested.

Expect household expenses to rise. More interior space could mean more utility expenses. More exterior space may mean more gardening and upkeep expenses. Older homes often need more maintenance.

Don't surrender savings, retirement and college expenses to afford a house. Buyers should get the ideal house, which may not be perfect.

Estimated "Ballpark" Starting Amount
The calculation below gives buyers a "ballpark number" to estimate when buyers have saved enough to take the next steps.
_______ $ Gross annual income
_______ $ x 3 Rule of Thumb sales price range (Price)
_______ Price - Down payment = Total Est. finance amount *
               * Use Total Est. amount for following calculations

Down Payment
Below are the down payment amounts buyers may need at closing for different types of loans and different obligations. These are based on the amount financed rather than the total price of the house.
_______ $ Total Est. Amount Financed
_______ $ x .03 Minimum conventional loan.
_______ $ x .035 Minimum FHA loan without grant
_______ $ x .05 Common conventional loan
_______ $ x .2 Minimum conventional loan to avoid PMI*
               * PMI is Private Mortgage Insurance collected by the bank to ensure the borrower pays
               the debt until the borrower has paid 20% of loan amount or gained 80% equity in the house.

Debt-To-Income Ratio
The debt-to-credit income is how lenders determine the amount of risk they will accept for any specific loan amount. Different lenders and loan types have different ratio thresholds. Please see previous page.
_______ Buyer total monthly expenses
_______ ÷ Gross monthly income
_______ = Total Debt Service Ratio

Expected Closing Costs
Below are the expected total expenses to calculate. It is based on the total price of the house rather than the amount financed.
_______ $ Total Agreed sale amount
_______ $ x .01 Earnest Money (EM) required on Day 1.
_______ $ x .035 Estimated Closing Costs (CC)
_______ CC - EM = Approximate amount needed at closing.

I've Got Your Six!