At the start of a home search, one of the most pressing questions on the minds of borrowers is how much can I be approved for? While it is a simple and straightforward question, the answer can be very convoluted, leading to a universal, it depends. Understanding what the lender is looking for will help you gather the right documents to help the lender approve you for the highest possible loan amount.
Factors Lender’s Consider
How much do you make? This can be a clear answer if you make a salary, work at a hospital or have another form of guaranteed income. Income that is reported through a w-2 and/or listed on a contract is generally accepted as proof of income. If you have a partnership or are working under self-employed status verifying and proving income can be more complicated.
When your income is guaranteed it is always counted by the lender. When your income is variable in the form of bonuses, performance incentives, or other factors that are paid out irregularly, the lender may or may not count the income. This can be a significant part of your pay structure, depending on how your practice is set up. If you are starting a practice or just out of residency, negotiating a guaranteed income will go a long way to simplifying the loan approval process.
It is also important to note that lenders use your gross pay to calculate income, before anything including taxes are taken out. This can be an important distinction because if you are investing in your retirement aggressively you may have a lower take home pay, and therefore may be more comfortable taking out a lower loan than the bank will approve you for.
How much do you owe? The next big question is looking at your debt. For physicians the student loan piece can be the largest portion of accumulated debt. What is counted is all debt that is reported to the credit bureaus. This generally includes any vehicle loans, student loans, credit card debt and so forth. The lender will count the minimum payment on the debt towards the total debt payment.
Many borrowers find that if you sign up for the income based payment on your student loan debt the loan payment will be at the lowest possible amount. You can make additional payments each month depending on your ability, but having the lower minimum payment will help increase your loan approval amount.
What is the debt to income ratio? After determining your debt and income the lender will then calculate your debt to income ratio and that will determine the approved loan amount. This ratio is set at around 43%, as the highest amount a bank will lend against. The specific ratio will be determined by the loan program you choose and your credit score, down payment, assets and the strength of the overall application.
Strong applications may see exceptions for a higher debt to income ratio. Lenders will add in the new mortgage payment with current debt to determine the maximum debt to income they are comfortable lending against.
Physician’s loans offer generous terms in the form of low down payment, waiving of mortgage insurance payments and other incentives to help you get approved for a larger loan amount. A review of the debt listed on your credit report and a review of your income and how it is structured can also go a long way to increasing the approval amount.