You are currently mulling over whether you should be purchasing a home and how much a lender will approve you for a mortgage. You can make a rough calculation of the monthly payment and then extrapolate that into an actual loan amount.
Lenders use a term known as debt to income ratios. They use two of them. One is known as a front end ratio.
The lender will use your gross monthly income to determine your front end ratio.
The front end ratio has to do with the house payment in relation to the gross monthly income. For government loans this ratio should be no more than 29%.
Conventional loans work the same way except their front end ratio raises to 33%.
To qualify for either type of loan you must qualify not only on the front end ratio but the back end as well.
The back end ratio is a compilation of all your monthly debt payments. Add your new house payment to those monthly debts and this percentage is your back end ratio.
Conv. mortgages will allow a ratio in the 38% range. Government mortgages allow up to 41%.
You probably say to yourself, "this is pretty easy. I'll just add and divide and that's that." Not so fast. The tough part about this making the correct determination of income.
For those on salary who have been on the job for a year plus, it is simple. Most people are not paid so simply.
Many people are on a 1099 as contract employees. Some are self employed and make a bunch of money but it doesn't necessarily show up on a tax return.
Others work seasonally and the list goes on and on.
If you want to get a feel for the least a lender will offer you for income would be to average your tax returns for 2 years and divide by 24. This will be a start if you fit into the latter categories.
It is a shame that mortgage companies require the use of tax returns like that. We all know you make quite a bit more money than what is shown.
If you really have no idea of how to factor your montly income you should consult with a mortgage professional. Good luck out there purchasing your home.
| < Prev |
|---|
