Five Factors that Determine Your Monthly Mortgage Payment

The five factors that are taken into consideration by your lender are the loan amount, the appraised value of your new home, the loan-to-value, your affordability, and your credit history. So let’s now take a closer look at each of these factors and the impact you can have as the owner-builder of your home and your financial profile:

Loan Amount - is the total amount owed when you complete construction on your home. It is made up of the cost to build, interest, closing costs and any other funds that may be included in the final loan amount. Lower is better. The land you select, the home you build and the types of finishes you choose all play a major part in your final loan amount. So keep looking for lower subcontractor bids, avoid expensive upgrades, do more of the work yourself and build quickly to reduce your construction loan interest.

The Appraised Value - is how much your completed home is worth when compared to similar homes in your local market. The appraised value depends on 4 basic factors – where your property is located, the square footage of your house, the number of bedrooms and bathrooms. Many people think costly upgrades such as granite countertops and hardwood floors increase appraised value – the fact is that they increase costs and do not necessarily increase appraised value. Higher is better. While you can’t control the prices that similar homes in your local market sell for, you can build your house according to the plans and do not add unnecessary material upgrades. In addition to not increasing your appraised value, unnecessary upgrades will increase your loan amount and, obviously your monthly mortgage payment.

The Loan to Value (LTV) - is calculated from the loan amount and the appraised value, and will be looked at very closely by your lender. The difference between the two amounts is the equity in the property. For example: a loan amount of $160,000 for a home appraised at $200,000 would result in $40,000 of equity with an 80% LTV.

$160,000       Loan Amount
$200,000       Divided by the Appraised Value
$40,000         in Equity or 80% LTV

Lower is better. The rule of thumb to understand is that the higher the LTV, the higher your mortgage rate and mortgage payment will be. From a mortgage lenders point of view, using the above example, a loan with an 80% LTV ($160,000 loan against a $200,000 appraisal) is less risky that a loan with a 90% LTV ($180,000 loan against a $200,000 appraisal); therefore the rate will be lower. To have the lowest possible LTV, you need to have the lowest loan amount possible and the highest appraisal.

Your Affordability (DTI) - as measured by debt-to-income (DTI) is calculated by totaling your housing expenses plus any other debt, such as credit cards and auto loans, which are then divided by your total gross income. This is known as your debt-to-income ratio or DTI and is another measure which will be looked at closely by your lender. Lower is better. Maintaining or increasing your income while reducing your debt improves your overall affordability. You may not be able to increase your income a great deal in a short period of time, but you can avoid adding any new debt.

Your Credit Score (FICO) - is a numeric evaluation of your credit history. The higher the score, the better the creditworthiness of the borrower and the lower your interest rate and payments. In general, your FICO score should be 550 or higher in order to successfully obtain a mortgage with our program. Higher is better. Your credit history is already established and will appear on a credit report. Your credit future is up to you. This will have the greatest impact on your monthly payment. Everyone’s credit score can improve. Actively working on your credit to increase your score will provide you with a greater selection of loan products.

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Balancing the 5 Factors You Control
One way to look at all these elements and how they affect your monthly payment is to imagine a balance scale similar to the two illustrated above. On one side, your FICO score is placed. On the other, your LTV and DTI. As you know, the HIGHER your FICO score the better. Conversely, the LOWER your DTI and LTV, the better. At the time you are applying for a mortgage, a range of interest rates will be available. No matter what the range, how these factors balance out will determine if you will be paying in the high, low or middle of that range.