You’ll have some negotiating power when you go shopping for a home, if you’ve been pre-approved for a mortgage. Sellers may be more interested in dealing with you because you look like a serious buyer.
To get pre-approved for a loan, you have to present some financial information to a lender. Lenders will want to see total housing payments of no more than 28 percent of your pretax income. With $60,000 in annual income, or $5,000 per month, for example, a lender might like to see total payments of no more than $1,400 a month.
However, those total payments include principal, interest, taxes, and insurance, and you won’t know upfront how much you’ll owe in taxes and insurance. Another rough rule of thumb is that your tax and insurance payments will be about the same as your principal and interest payments on a mortgage.
In the above example, principal and interest would be around $700 per month, around half of $1,400. Assuming a 5 percent interest rate, you’d be able to get a 30-year mortgage of nearly $170,000: 5 percent of $170,000 equals $8,500 a year in interest, or about $700 a month.
In addition, lenders don’t want total debt obligations to exceed 36 percent of pretax income. Thus, if you owe large amounts on credit cards, car loans, student loans, etc., you may find yourself being offered a smaller mortgage.
