Mortgage Company Lends Based Upon Debts/Income
Posted on February 2, 2009 in the Real Estate category
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To understand how much home you can purchase is really a function of the payment of the home, your income and your current debt load. To know these items you can plug them into a formula to help you make the determination.
Lenders use a term known as debt to income ratios. They use two of them. One is known as a front end ratio.
The lender will use your gross monthly income to determine your front end ratio.
Convential and FHA mortgages work slightly differently. Relative to the gross income the total house payment should not make up more than twenty nine percent for FHA.
Convential mortgages are a bit more liberal in they will approve a thirty-three percent of the gross income.
Now that we have discussed the front end ratio we must now tack the back end. You must qualify for both.
Determining the backend ratio is similar to the front end except one must add to the house payment to all other monthly payments made to creditors. This total amount in relation to the gross income is your figure.
Conv. mortgages will allow a ratio in the 38% range. Government mortgages allow up to 41%.
Where you can get into a little trouble in determining these ratios is factoring the proper income. Factoring monthly debt is a piece of cake comparatively.
For those on salary who have been on the job for a year plus, it is simple. Most people are not paid so simply.
Many people are on a 1099 as contract employees. Some are self employed and make a bunch of money but it doesn’t necessarily show up on a tax return.
This is only a partial list. It’s much more extensive.
If you want to get a feel for the least a lender will offer you for income would be to average your tax returns for 2 years and divide by 24. This will be a start if you fit into the latter categories.
Most hate me for saying that to them, but lenders look at facts when determining how much they will lend to you. Especially today with all the financial turmoil.
Once you come to some conclusion here you should still seek the advice of a good mortgage lender. I wish you the best in your next home purchase.
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Unfortunately DTI’s are creeping up significantly in the states since a lot of people losing their jobs are applying for credit cards, have existing car payments, etc…When they take on new jobs and their income is a fraction of what they were making their DTI gets out of whack. Most are shocked to learn what DTI’s are after they are denied the loan.