Know your ratios
When you determine the mortgage lender that you are comfortable
with and that will meet your needs, the mortgage lender will then
start to determine your ability to make your house payments.
One key part of determining your ability to pay is based on two
ratios that all mortgage lenders use to decide whether to loan
you money. The first one is a house to income ratio that helps
determine how large of a house payment you can afford and the
second one is a debt to income ratio that helps determine if the
house payment will allow you to live a normal life and fit into
your income.
The house to income ratio helps determine how much of a house
payment that you can afford. Here is an example of a house to
income ratio: Say you make $30,000 a year in salary, you divide
this figure by 12 to get $2,500 monthly gross income. Then you
multiply $2,500 times a ratio that is determined by the kind of
financing you qualify for. Typical ratios for conventional loans
are 28 percent. FHA loans ratios are 29 percent. Using our salary
example, you would multiply $2,500 by 28 percent and come up with
an affordable monthly payment of $700.
The second ratio, a debt to income ratio, determines the total
amount of debt that you can afford. The ratio for debt to income
with conventional loans is 36 percent and for FHA it is 41 percent.
So using our example of a $2,500 gross monthly income and applying
for a conventional loan, you would multiply $2,500 by 36 percent
and come up with a total debt figure of $900 that you can afford
each month.
So if you can afford a house payment of $700 and total debt of
$900, this means that you can only afford additional debt of $200.
Although these calculations may seem complex, they are an important
part of lending you money and ensuring that you can enjoy your
home and are not stretched beyond your means trying to make your
monthly payments.
