| In addition to your income,
a lender will look at your minimum monthly debts to
calculate you debt ratios. The debt ratio's is what
will determine "how much" loan you can afford.
Following are the two types of debt ratio's
that will be use:
- Front-End Ratio - this
is your gross income divided by the new PITI mortgage payment.
This standard guideline is 33%.
- Back-End Ratio - this is
your gross income divided by the new PITI mortgage payment
and also you minimum monthly payments from you liabilities.
The standard guideline is 43%
Following is the typical debts used to determine
your qualifying ratio's:
Front-End Ratios
- your current and or future house payment
Back-End Ratios- the minimum required
monthly payments on all of the following:
- Auto Loans - (except if there is
less than 9 months left to pay off)
- Student Loans - (except if there
is less than 9 months left to pay off)
- Personal Loans (except if there
is less than 9 months left to pay off)
- Charge Cards - minimum required payments
only.
- Child Support - (except if
there is less than 9 months left to pay off)
- Alimony - (except if there
is less than 9 months left to pay off)
- Federal Tax Lien Repayment Schedules -
(if less than 9 months not calculated)
Following are monthly liabilities that are
not used to calculate debt ratio's:
- Utility Bills
- Car & Health Insurance
- Cell Phone Bills
The percentage of debts to income is called the
debt-to-income (a.k.a.: back-end) ratios. A good goal is to spend
no more than 43% of your income on all debts, including house payment.
However, under FHA home loan guidelines you're allowed to spend
up to 43% of your monthly income on housing and other debts --
if the rest of your application shows you can handle it.
An example of the income to debt calculation
is as follows:
Income = $3,000
New Mortgage Payment = $900.
Minimum Monthly Payments = $300
"Mortgage" divided by "Income" =
33%
"Mortgage + Monthly Payments" divided
by "Income" = 43%
In this scenario, your front-end is 30% and
back-end is 40% which is acceptable for a FHA loan.
These ratios can also adjusted
or exceeded
if there are item(s) you can payoff, lower interest the interest
rate, lower the loan amount, etc.
FHA is the most flexible
lender regarding debt ratio's. Never rule yourself out of buying
a home until you have spoken to a mortgage professional. |
