How Much Home Can You Afford?

In determining your maximum mortgage amount, lenders use guidelines called debt to income ratios. This is simply the percentage of your gross monthly income (before taxes) that is used to pay your monthly debts. They use two separate calculations in figuring the percentages. You have a front end ratio and a back end ratio.

Front End Ratio

This is your proposed monthly housing expenses divided by your monthly gross income. Your proposed housing expense includes your principal and interest payment as well as taxes, insurance, mortgage insurance (if applicable) and homeowners association dues (if applicable). This percentage should be between 28 and 31% depending on the loan.

Back End Ratio

This is a percentage based upon your consumer debt you owe monthly as well as the proposed housing and your gross monthly income earned. For example: If you debts are $1800 a month and your income is $5000 a month your DTI would 1800/5000 which equals a 36% DTI. Anything below 42% is usually acceptable to a lender for a conventional or an FHA (Federal Housing Administration) loan, but some consider DTI’s all they way up to 50% depending on the type of loan you are receiving.

When you are applying for a loan you need to consider that there are some debts that will not always show up on your credit report, but a lender will require you to disclose these debts. Debts or expenses such as food, entertainment and utilities do not show up on your credit report and are not required in calculating your debt to income ratio. They do although require such expenses as alimony, child support or a private loan or mortgage you have received to be disclosed. When I say disclosed I mean they require these expenses to be listed on your application along with your debts already posted from your credit report.

These specific payments also work in reverse for considering more income. If you are on the receiving end of alimony or child support from someone you can add that to your monthly income as long as you have been receiving it for at least 2 years and it will continue for at least 3 years. You would list it under other income on your application.

Most mortgage loans today are run through an automated underwriting engine specific to the lender your mortgage broker has chosen for you. They consider many factors, but your DTI or debt to income ratio is of significant importance. Your DTI tells them whether you can afford the home loan you are applying for.

If your DTI is in excess of the lenders guidelines, compensating factors can sometimes be used to justify approval of the loan. Compensating factors are supporting documentation or additional resources that will make the loan be of less risk to the lender.

Related posts:

  1. Cash Assets & Your New Home
    In applying for a loan, assets are an important contributing factor. Lenders want to see that you have enough cash assets in order to make the loan workable. Some base...
  2. Credit History & Your Loan Rate
    Understanding credit and how it affects you in financial situations is very important. Credit is one of the biggest determining factors in getting a loan of any kind. Lending institutions and...
  3. Increase Home Value with Open-End Mortgages
    Borrowers who want to use mortgage funds to improve their homes can do so through open-end mortgages. Open-end mortgages with mortgage rates give borrowers the ability to borrow additional money...
  4. 3 Ways to Revive Your Credit Score
    A credit score can’t be rebuilt overnight. If you’ve encountered tough times and have seen your credit score drop in recent years, the sad reality is it will take some...
  5. Ways To Save Your Home When Behind on Mortgage Payments
    Many homeowners are struggling with their monthly mortgage rate payments and wondering will they take my home when I’m behind on the mortgage. Thousands of people are dealing with the...

Speak Your Mind