How Much Can I Buy
I frequently have new investors who are eager to view potential properties and get started right away, but they have no idea what they can actually afford. Many of them even ask ME “How much can I buy?” Unfortunately, without the sophisticated tools and software lenders use, I’m at a loss to even guess. Sadly too, often what people think their financial state is, differs from what it actually is.
So usually I recommend the new investor make a quick phone call to their favorite lender/bank/credit union/mortgage company (and I’ll recommend a few, if they don’t have a favorite). That person will ask a bunch of questions in order to make a close approximation. He or she will collect this information and make a determination as to how much the investor can be pre-approved for.
One of the first things the lender needs is a social security number. They use this to run a credit report. From this they learn the full credit history, how much debt is on loans and credit cards, how much open (unused) credit is available, what credit score is and your whole financial history. This will tell them exactly what your current financial state is.
From all this information, one of the first things they will calculate is your debt to income ratio (DTI). This is an important number to know, because it will tell them how much you can afford to borrow. And it’s exactly like it sounds: it is the ratio between how much income you receive and how much debt you have. If you earn $4000 per month and have payments of $2000 per month your debt to income ratio is 50%. (it’s actually much more sophisticated than that, but you get the idea)
The lender will also need to know what types of funds you have in your IRAs, 401Ks, stock and stock options, other retirement plans or savings. If you own your own home, they will need to know how much equity you have in it.
After this phone call, they will be able to “ballpark” what you may qualify for. And that estimate is based on all the information you gave them is true. If it turns out that your income, or some other factor has changed, so too will the amount you may qualify for.
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