Debt to Income (DTI) Ratio is the next factor in qualifying for a mortgage loan after analyzing credit and your scores. How much you owe vs. How much you make?
The lender does not want you to be "house poor" Housing expenses exceeding other debts or more than 50% of your monthly gross income.
To determine your affordability for your loan program of choice, the lender will review your monthly obligations from your credit report:
Please note that if you have a deferred student loan, the lender is required to estimate a payment of up to 1% of the loan balance.
Write down the following
- Credit Card Payments
- Car Payments
- Student Loan Payments
- Other Installment Loan Payments
To arrive at an "affordable" home price, we followed the guidelines of most lenders. In general, that means your total debt payments should be no more than 36% of your gross income.
Once you enter your monthly debt (including credit cards, student loan and car payments), we come up with a maximum monthly home payment you could handle while staying under that threshold.
Why do lenders use this guideline? It’s been shown to be a level of debt that most borrowers can comfortably repay.
That home payment assumes a 30-year mortgage at current rates, and includes 1% property tax and 0.4% for homeowners insurance.
It does not factor in private mortgage insurance, which you'll owe if your down payment is less than 20% of the purchase price.
You should reduce the maximum target if you have other savings needs (such as retirement and college) or additional expenses (such as child care, private school tuition, health care, or alimony payments). Source: money.cnn.com
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