|
To determine
your maximum mortgage amount, lenders
use guidelines called debt-to-income
ratios. This is simply the
percentage of your monthly gross income
(before taxes) that is used to pay your
monthly debts. Because there are
two calculations, there is a
"front" ratio and a
"back" ratio and they are
generally written in the following
format: 33/38.
The front
ratio is the percentage of your monthly
gross income (before taxes) that is used
to pay your housing costs, including
principal, interest, taxes, insurance,
mortgage insurance (when applicable) and
homeowners association fees (when
applicable). The back ratio is the
same thing, only it also includes your
monthly consumer debt. Consumer
debt can be car payments, credit card
debt, installment loans, and similar
related expenses. Auto or life
insurance is not considered a debt.
A common
guideline for debt-to-income ratios is
33/38. A borrower's housing costs
consume thirty-three percent of their
monthly income. Add their monthly
consumer debt to the housing costs, and
it should take no more than thirty-eight
percent of their monthly income to meet
those obligations.
The
guidelines are just guidelines and they
are flexible. If you make a small
down payment, the guidelines are more
rigid. If you have marginal
credit, the guidelines are more rigid.
If you make a larger down payment or
have sterling credit, the guidelines are
less rigid. The guidelines also
vary according to loan program.
FHA guidelines state that a 29/41
qualifying ratio is acceptable. VA
guidelines do not have a front ratio at
all, but the guideline for the back
ratio is 41.
Example:
If you make $5000 a month, with 33/38
qualifying ratio guidelines, your
maximum monthly housing cost should be
around $1650. Including your
consumer debt, your monthly housing and
credit expenditures should be around
$1900 as a maximum.
|
