The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 22nd, 2014

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How Much House Can You Afford?

DebtDebt-to-Income is probably the most important aspect lenders consider when reviewing your mortgage application for approval.  Here’s a quick overview on what goes into DTIs and why it’s so important. Debt-to-income ratios for a mortgage lender is the most direct indication as to whether you can afford to repay the money you want to borrow.

Debt ratios for home loans come with two components: The first measures your gross income from all sources before taxes, against your proposed monthly housing expenses including the principal, interest, property taxes, home owners insurance and any possible home owners association dues.

As a general target, lenders like to see your housing expense ratio come in at no higher than 28 percent of gross monthly income.  There is some flexibility to go higher, if other factors on your overall strengths come to play. According to mortgage software and research firm Ellie Mae LLC, the average borrower who obtained home purchase money through investors Fannie Mae and Freddie Mac had housing expense ratios averaging 22 percent. The Federal Housing Administration approved borrowers had average housing expense ratios of 28 percent.

The second component is your total recurring debt including your proposed house payment, so-called back-end ratio.  Lenders measure your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments, loans you area a co-borrower for.

Under federal “qualified mortgage” standards that took effect in January, your back-end ratio maximum generally can’t be more than 43 percent, though again there is wiggle room case-by- case.  Be prepared to justify why you think a high DTI isn’t an issue and it needs to make sense, not only just to you. Most lenders making loans eligible for sale to Fannie or Freddie and they prefer not to see you anywhere close to 43 percent.

In May or this year, according to Ellie Mae, the average approved home purchase applicant had a back-end ratio of 34 percent. Even at FHA, which tends to be more lenient on credit matters than Fannie or Freddie, the average back-end ratio for buyers was 41 percent and the average for denied applications was 47 percent.

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