Sponsored - A mortgage applicant with high levels of debt relative to income is not an appealing risk for lenders.
Therefore, first time homebuyers and seasoned buyer, should ensure their debt to income ratios are within an acceptable limit if they are counting on a quick approval.
A buyer’s debt to income ratio is one of the most critical factors in the loan review process because it helps determine an individual’s ability to repay. It is calculated by totaling the borrower’s monthly debt obligations and dividing their total debt by gross monthly income.
The debt figures include monthly payments on outstanding loans, credit card balances, and child support orders, even IRS monthly payments and taxes and insurance payments on real property that they own. These are added to the proposed mortgage payment and associated housing expenses such as, real estate taxes, property insurance and mortgage insurance if it applies. Individuals are often surprised to know that if they own other real property – even if it is free and clear we have to include the cost of their property taxes and insurance on this other property as a monthly obligation.
It does not include utility expenses but if a borrower has a student loan where payments are in deferral, meaning they are not making payments yet, we would still have to count 1% of the loan balance as a monthly obligation – per FNMA and FHLMC guidelines or for loans back by the Federal Housing Administration the figure is 2%.
A borrower with a total monthly debt obligation of 3500 and a gross monthly income of 8500 would have a debt to income ratio of 41%. That is approaching the limit of what Fannie Mae or other government agency backed loans would like to see.
Technically ratios of 43% is the ceiling for a qualified mortgage defined by the regulations put into place in 2014 requiring lenders to ensure buyers ability to repay.
Sometimes we can get our automated underwriting systems to approve borrowers with ratios as high as 50% when the higher debt is strongly compensated with other factors - such as high cash reserves after closing – a large down payment – excellent credit history – or a high likelihood of increasing income. For instance you usually will need 12 months reserves to get ratio approval over 45 or higher down payment and sterling credit or both.
All of the above are not absolutes - there are ways to reduce ratio’s that are determined to be too high by buying down the interest rate or making more of a down payment or even to do lender paid mortgage insurance on the conventional loans. When these solutions don’t work sometimes a co borrower will add additional income that can get us loan approval.
Finally let’s remember that qualification is a very ruled based business that is dependent on the type of loan and many other factors. You as the borrower should also be aware that ultimately you – not the lender- has to make the mortgage payment. Other factors to consider is how energy efficient is your home – and therefore how high will your energy bills be. New Homes in Anchorage will have much higher energy efficiency which will reduce your monthly heating bills and also reduce the likelihood that you will be facing expenses for new roofs or boilers. Finally and perhaps most importantly is what are your other spending habits ? Do you like a latte every day and do you eat out a lot.
In the long run most of us would trade that purchased latte for the comforts and stability of owning a home – but it is a choice we have to realize we are making.
You could end up what they call house poor when you can afford your mortgage but you can't forward to go out to eat or movies.. Etc...