Lenders Lend X Amount Based Upon These Ratios

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.

Convential and FHA mortgages work slightly differently. Relative to the gross income the total house payment should not make up more than twenty nine percent for FHA.

Convential mortgages are a bit more liberal in they will approve a thirty-three percent of the gross income.

Now that we have discussed the front end ratio we must now tack the back end. You must qualify for both.

Determining the backend ratio is similar to the front end except one must add to the house payment to all other monthly payments made to creditors. This total amount in relation to the gross income is your figure.

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.

It runs the gambit from construction workers who make money based upon the economic environment, to hourly workers, to commissioned based folks who write off everything under the sun on their returns.

Others work part time, and you can add many etc’s here.

A good rule of thumb if you are basically self employed or receive most of your income via commission is to average your last two years tax returns.

Folks who write off a bunch on their returns really dislike this. With the financial markets in the toilet and lenders tightening up the ship underwriting is becoming more strict.

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.