Finding out how much you can borrow to buy or refinance a home is both science and art. The answer will vary according to the lender you chose,underwriting standards, your financial history, the type of loan you seek, the business climate at the time you apply, and the exceptions that a lender might be willing to make to obtain your business.

Still, it is possible to develop a good sense of how much you can borrow or refinance. By filling in the following charts you will be able to target your borrowing power with a conventional mortgage. Specific figures, of course, can only be determined by individual lenders.

Before we begin, let's look at a conventional mortgage. A conventional loan is generally defined as a mortgage with equal monthly payments, a 30-year term, and a fixed interest rate established when the mortgage is created.

A conventional mortgage is also defined in terms of its "loan to value" ratio or LTV. An 80 percent LTV is the standard for conventional loans,a percentage which means that if a house costs $100,000, the lender will provide financing worth $80,000 (80 percent of the purchase price) and the borrower will put up $20,000 (20 percent). Closing costs are EXTRA AND ADDITIONAL above the $20,000.

Step 1: INCOME

The chart below will allow you to show your income for the most current full year and the previous full year. Loan underwriters will want to look at your income over the two or three years, so be certain to supply all requested information.

QUESTIONS

Do you expect to receive "bonus" income in the future? Yes _____. No _____.

Do you expect to receive "overtime" income in the future? Yes _____. No _____.

Will "other" income continue at current levels? Yes _____. No _____.

If you own your home and use it as a prime residence, what is the estimated fair market value? $  _____.

What is the value of all financing now secured by your home? $  .

IMPORTANT POINTS:

*You do NOT need a co-borrower to apply for a mortgage. However, the additional income represented by a co-borrower may allow you to obtain a bigger mortgage.

**If you own rental property, lenders will generally add back the depreciation deducted each year on such "improvements" such as a house, but not stoves, clothes washers, etc.

***You are NOT required to disclose the receipt of alimony, child support payments or separate maintenance to a lender. However, disclosure of the additional income represented by such payments may allow you to borrow a larger amount. You must disclose the payment of alimony, child support and separate maintenance.

STEP 2: DEBTS

The following chart will allow you to itemize current debts. Keep this information updated and available for lenders. (Note that by "monthly payment" lenders mean the minimum amount you are REQUIRED to pay each month. For instance, if you owe $800 on a credit card and pay $50 per month, that's fine. If the minimum required payment is $25, then write "$25" on the chart in the second column.)

STEP 3: RELATED INFORMATION

What is your current or projected cost for property taxes this year? __________.

What is your current or projected cost for fire, theft and liability insurance this year? _________.

What is your current or projected cost for condominium fees ___________. (Note: Borrowing projections are not available here for those purchasing cooperative units because the co-op fee often includes the expense of an underlying mortgage.)

What are your projected closing costs for such items as points, fees, a termite inspection, transfer taxes, reserves to be held by the lender, and other expenses? List the net amount; that is, total costs less any contributions from a seller, builder or broker. __________.

STEP 4: WORKING THE NUMBERS

When making a conventional mortgage, lenders typically (though not always) qualify would-be borrowers on the following basis: up to 28 percent of your gross income can be used to cover mortgage principal and interest,insurance, and taxes. If you buy or refinance a condo, condo fees are generally deducted from the amount available each month for basic housing costs. That is, if you can spend $800 a month for principal, interest, taxes and insurance (PITI) and you also have a $100 a month condo fee, lenders will generally allow only $700 when calculating how much you can afford for PITI.

So, in general terms, take your gross income before taxes and multiply by 28 percent. This is the amount lenders will allocate for mortgage principal, mortgage interest, property taxes, and insurance. (PITI)

Then, take your gross income and multiply by 36 percent. This is the amount that lenders will allow for PITI plus monthly costs such as credit card debt and car payments.

Note that other loan formats allow a greater percentage of your income to be spent for PITI and other monthly costs, so you could borrow more.

What can you borrow? You can use the calculators below to help determine your borrowing power in general terms. Always speak to lenders for specific information.

CALCULATORS

• Compute A Monthly Payment
• Create An Amortization Statement
• How Much Can You Borrow?
• Monthly Payments For Different Rates
• How Big A House Can You Afford?

STEP 5: HOW MUCH CAN YOU BUY?

Once you know roughly how much you can borrow, you can also find out (roughly) how much you can buy.

Remember that a conventional loan, by definition can equal 80 percent of the purchase price for a prime residence. So, if you are qualified to borrow,say, $120,000, that means $120,000 equals 80 percent of the purchase price, or $150,000 ($120,000 divided by 80 = 1,500. Multiply 1,500 x 100 = $150,000).

The down payment in this case would be $30,000 ($150,000 less $120,000) PLUS there are also costs for closing, moving, decorating, etc.

To some extent, lenders will allow so-called "seller contributions" to help offset your closing costs. Such contributions can be in the form of a credit to underwrite closing costs, money for a new roof, or a willingness by the seller to pay points. Lenders, however, will limit seller contributions,usually to 3 to 6 percent of the selling price, depending on the lender, how much is put down, and how the lender defines "contributions." Speak to your lender for details.

Copyright 1992, 1998, 1999 Peter G. Miller. All Rights Reserved.

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