When you’re thinking about buying a house, the lender or your Fairbanks Real Estate Broker will calculate the price that you qualify for by 2 different methods.
The Payment to Income Ratio is a fairly simple formula. It adds your future mortgage payment, property taxes and insurance together to get what is called a “PITI” payment. Taxes usually mean there is an assessment of taxes on your property and sometimes depending on your area there might be a tax on the transaction itself. The insurance is usually two-fold.
The first type of insurance has to do with the physical real property and its called “homeowners insurance”. The second type is private mortgage insurance, which only takes place if you are putting down less than 20% of the appraised value of the property. So most homeowners pay this type of insurance for the first 5-10 years depending on how their loan is structured until they reach 20% equity in the value of their home.
The PMI figure is what an original mortgage was created on, 20% down and the bank would loan the other 80%. Since today that is still considered “acceptable risk” by lenders, they will charge PMI anytime a down payment is under 20%.
Some industry standards just don’t change regardless of how much time has passed.
So now if you add your “PITI” payment along with all other monthly payments including credit card payments, investments, car loans plus all other fixed monthly expenses then you get a figure know as your Debt to Income Ratio. This percentage is varies from lender to lender based on how high of a percentage they are willing to approve a loan on. I have seen as high as 38%.
So if you calculate your payment to income ratio and you find a fairbanks real estate monthly payment that is about 30% of your total income, then you know what you can afford after looking at a loan amortization chart which you can get from your local fairbanks realtors or from your local lender. This will tell you the amount you can borrow to purchase a home. Notwithstanding, this number has to be adjusted once you know how much you will be putting down, current interest rates and the terms of the mortgage.