June 9th, 2017 8:58 AM by Jackie A. Graves, President
When you purchase a home, mortgage lenders go through a
number of anxiety-inducing variables—including your credit score, your
income, and your work history—with a fine-toothed comb. But even if all
these indicate you're a good candidate for a mortgage, something called an
"expense ratio" could still be a deal breaker.
ratio is the metric that helps lenders quantify how much a mortgage will stress your income. This
number, also known as a front ratio, compares all of your housing
expenses with your pretax household income.
general rule of thumb is that you can purchase a home that costs two to three
times your annual salary—but this is only an estimate, and does not account for
your monthly bills, expenses, and debt," says financial expert Harrine Freeman.
look at two percentages to come up with your expense ratio: your
housing expense ratio and your debt-to-income ratio. Neither one needs
to be perfect, but veering toward unacceptable might result in a denial.
ratio analyzes only how your housing costs relate to your monthly income. To
figure out this number, first determine all of the associated fees, costs, and
responsibilities your potential new home will require. Consider the following:
greater disparity between your housing expenses and income, the lower (and
better) your housing expense ratio is. The maximum ratio most lenders will
permit is 28%; anything below that is good.
For example, say a couple's possible monthly mortgage is
$975—but homeowners insurance will cost $75 a month, taxes tack on $50 a
month, and the neighborhood HOA fees are $25 a month. Since
they're not putting 20% down, the lender requires a $75 PMI payment,
bringing their total housing costs to $1,200.
by their cumulative monthly salary (before taxes) of $5,000, Harry and
Sally's housing expense-to-income ratio is 28%—the absolute maximum most
lenders will permit.
lenders require a debt-to-income ratio no higher than 36%, although Freeman
says people should try to get it to 28% or lower.
an example: Our friends Harry and Sally make $5,000 per month. Their new
housing costs will be $1,200 per month. Add in their two car loans—$500 total—and
the wife's student debt—an additional $300 per month—to come up with
a total cost of $2,000 per month.
Dividing their total monthly
debt by their income and multiplying that by 100 create a debt-to-income ratio
of 40%—a risky bet. But if their debt dropped by $600
a month, their ratio would be 28%. For most lenders, that ratio is
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