Did you ever wonder how a bank determines just how much they will lend you when you’re ready to purchase your new home? Basically, banks look at how much you are collecting each month in income and compare it to how much you’re paying out in expenses. They call this comparison or analysis, a debt-to-income ratio. When you finish reading how they calculate your debt-to-income ratio, you’ll be smacking your forehead saying I can calculate that myself.
I know some of you will say, I’ll just let the bank do the calculation and they can let me know if I qualify. I say be smart about your finances, be proactive and know where you stand before applying for a mortgage.
In its simplest form, the calculation is Debt/Income = Debt-to-Income Ratio. Now let me elaborate on what goes into each component of the calculation.
The debt that goes into this calculation is anything that runs through your credit report and has to be paid on a recurring basis, usually monthly. Examples are credit cards, student loans, unsecured lines of credit and car payments. If you plan on keeping a home you currently live in, and it has a mortgage or secured line of credit, those monthly payments will also be included in the calculation. The bank DOES NOT calculate the ratio based on the cable bill, utilities or any other monthly bill that does not appear on your credit report. Here’s where you add up all those monthly payments to get a total.
Another portion of the debt number is the future mortgage payment. Just scroll to the bottom of any one of our listings and look for the Mortgage Calculator. This will calculate your future mortgage payment on your dream home.
Income is anything you can trace to a source document, Pay Stubs, W2s, Bank Statements, and Tax Returns. The more income streams the better.
- Tips and bonuses
- Social Security
- Child support and alimony
No one getting paid “under the table” is buying a house if you are not paying taxes on the money you receive. Lenders want proof of how much you’re getting, how often you are getting it, where it’s coming from and whether or not you are paying taxes on it, as required.
By this time, you are wondering, “what is the magic number”? Lenders want you to stay at no more than 43%, including your future mortgage. If the percentage is over 43%, that’s not the house for you. Staying below that number increases the likelihood of longevity in your new home. We know everyone doesn’t like “doing the math”. If that’s the case, give us a call and we can refer you to one of our awesome lender partners to assist you and get you preapproved for a new home.
Call today and let’s get the ball rolling!!