Debt-to-Income Ratio Affects Approval & the Interest Rate

Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval. It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.

Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.

By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income. Lenders actually look at two different ratios commonly called the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees. Lenders generally don't want these expenses to be more than 28% of the monthly gross income.

The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier. Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%. Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.

If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income. Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income.

For the sake of an example, let's say that their monthly debt was $900. That would only leave $1,980 for the maximum house payment. The monthly debt became a limiting factor affecting the house payment.

In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate. Having good credit and having the proper ratios can result in being approved for a mortgage. On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.

While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project. A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.

Both things are important to know before you start looking at homes and especially before you contract for one. All lenders are not the same. Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide.

Comments

Advice for First-Generation Homebuyers

ICYMI: The sense of pride you’ll feel when you purchase a home can’t be overstated. For first-generation homebuyers, that feeling of accomplishment is even greater. That’s because the pride of homeownership for first-generation buyers extends far beyond the homebuyer. AJ Barkley, Head of Neighborhood and Community Lending for Bank of America, says: “Achieving this goal can […] http://dlvr.it/SFRWC5

A Crucial First Step: Mortgage Pre-Approval [INFOGRAPHIC]

ICYMI: Some Highlights * Mortgage pre-approval means a lender has reviewed your finances and, based on factors like your income, debt, and credit history, determined how much you’re qualified to borrow. * Being pre-approved for a loan can give you clarity while planning your homebuying budget, confidence in your ability to secure a loan, and helps sellers know your offer is serious. * Connect with a trusted professional to learn more and start your homebuying process today. http://dlvr.it/SYW20K

Three Reasons to Refinance

Three reasons to refinance a home include lowering the cost of housing, shortening the term of the mortgage to pay it off sooner or to using the equity to accomplish another purpose. Replacing the mortgage at a lower interest rate, which is entirely possible in today's market, would reduce the payment. On the other hand, shortening the term of the mortgage could make the payments increase but would allow the home to be paid for sooner. In either case, the equity would not be reduced unless the refinancing costs were rolled into the new mortgage. Refinancing the home to take money out would increase the mortgage on the property and lower an owner's equity; careful consideration should be made before doing so. Mortgage rates are considerably lower than credit card rates and usually lower than short term borrowing like student loans or car loans. For that reason, homeowners will sometimes refinance to payoff higher cost debt. Some people refinance for more than...

So you’re thinking about buying your first home.

Moving Into Your New Home : One of the most important parts of a real estate transaction is moving! Gayla Dixon from UniGroup, the parent company of United Van Lines and Mayflower Transit, shares money-saving strategies for moving and how decluttering can help you feel better about getting into your new location https://www.sellagent369.com/results/?

Multigenerational Housing Is Gaining Momentum [INFOGRAPHIC]

FYI: Some Highlights * If your house is feeling a little cramped with the addition of adult children or aging parents, it might be time to consider a move-up into a multigenerational home that better suits your changing needs. * With benefits that include a combined homebuying budget and shared caregiving duties, an increasing number of households are discovering the value of a multigenerational home. * With such high demand for houses today, now is a great time to sell so you can upgrade to a multigenerational home that may better suit your evolving needs. http://dlvr.it/RxSpmH

Do you like to negotiate?

Whether you like to or not, buying and selling a home involves negotiation at all stages of the process. It is not like the retail world where once you decide to purchase, you pay the price. It is easily the most expensive purchase or sale that most people experience and emotions get involved that could affect the negotiations adversely. The word "home" by itself conjures up emotions and selling a home you've lived in for a while could even complicate things more. A real estate professional can separate their emotions from the process to be able to help the one they are representing. The price of the home, the type of financing and concessions, closing costs, personal property, closing dates and possession are just a few of the many things that can be negotiated in a contract. Since the seller wants to get the most for their house and the buyer wants to pay the least, their objectives are diametrically opposed. Even after the contract is signed, removin...

4 Things To Expect from the Spring Housing Market

Spring is in full swing, and the housing market is picking up along with it. http://dlvr.it/TJjhYP

The Cost of a Home Is Far More Important than the Price

Housing inventory is at an all-time low. There are 39% fewer homes for sale today than at this time last year, and buyer demand continues to set records. Zillow recently reported: “Newly pending sales are up 25.5% compared to the same week last year, the highest year-over-year increase in the weekly Zillow database.” Whenever there […] https://www.simplifyingthemarket.com/en/2020/09/22/the-cost-of-a-home-is-far-more-important-than-the-price/?a=492508-5792a6ba3fc4f971e5ea39a74a0ea948&utm_source=dlvr.it&utm_medium=blogger

Rental Home Investments

Rental homes whether they be single-family detached properties, condos, two, three or four-unit properties share many of the same benefits. Most people instinctively understand many of the working parts because they are the same as their home. They have a basic understanding of value and how to maintain the property. The service providers for a home would be the same for a rental home. These properties allow an investor to obtain a large loan-to-value mortgage at fixed interest rates for up to thirty years. They appreciate in value, currently exceeding many other assets; have defined tax advantages and allow an investor more control than many alternative investments. Most lenders require 20-25% down payment and will finance the balance at rates close to owner-occupied homes. Buyer closing costs will add another three to four percent to the amount of cash needed to close. It is also prudent to have available funds for repairs and maintenanc...

The Real Estate Market: What You Need to Know to Make Informed Decision

Search This Blog