Advertisement
real estate

Numbers to Know Before Applying for a Loan

These three numbers could make a big difference in your ability to get a mortgage -- and how much you'll pay.

EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.

Lenders look at three things when you apply for a mortgage: credit score, debt-to-income ratio and down payment. "If you've got two of the three elements working for you, you're in good shape to buy," says Jim McMillan, a senior loan officer with JP Mortgage/JPMorgan Chase.

All lenders are credit-score driven these days. FICO scores, the most commonly used, range from 300 to 850. The higher your score, the more flexible lenders will be. With a score of 700 or higher, syas McMillan, you'll be considered an A borrower and qualify for the best rates.

Advertisement - Article continues below

Another consideration is your debt-to-income ratio. Traditionally, lenders have followed the 28/36 rule: No more than 28% of your monthly gross income should be dedicated to your mortgage payment, property taxes and insurance, with total debt payments equaling no more than 36% of your gross income.

This means if you make $40,000 a year, your payment for your mortgage, property taxes and insurance should be no more than $933 a month. Payments on total debt should be no more than $1,200 a month.

But if you have no other debt, you can dedicate 36% of your income -- $1,200 in our example -- to housing payments. With an FHA-backed loan, you may be permitted to apply up to 41% of your income to total debt.

Advertisement
Advertisement - Article continues below

The more money you put down, the less risk the lender takes on - and the more likely you are to snag the loan. A 20% down payment is the threshold at which you're exempt from private mortgage insurance, which can add a few hundred dollars to your monthly payment. PMI is totally tax-deductible for 2007 if your adjusted gross income is less than $100,000, and Congress is expected to extend the tax break into 2008. Contracts written before 2007 are ineligible for the deduction.

Order your copy of Kiplinger's special issue Success With Your Money. It will tell you how to make the most of your money -- and make a seamless transition to the next phase of your life.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020

Recommended

13 Tax Breaks for Homeowners and Home Buyers
income tax

13 Tax Breaks for Homeowners and Home Buyers

Owning (or buying) a home is expensive. But at least there are some tax deductions, credits, and exclusions that can help you recoup some of those cos…
June 22, 2020
12 Things Every Home Buyer Should Do
real estate

12 Things Every Home Buyer Should Do

Buying a home may be one of the biggest purchases you will ever make.
June 12, 2020
11 Things Every Home Seller Should Do
real estate

11 Things Every Home Seller Should Do

As a home seller, your goal is to sell your property quickly for the most money possible.
June 12, 2020
13 Reasons You Will Regret an RV in Retirement
retirement

13 Reasons You Will Regret an RV in Retirement

RV-loving retirees talk about the downsides of spending retirement in a motorhome, travel trailer, fifth wheel or other recreational vehicle.
June 8, 2020