Debt to income ratio(DTI) can determine house affordability. People always associate quality mortgage with credit score. DTI can also depict the same story. Lower debt to income ratio increases your chances of securing a mortgage. DTI and future housing costs can help you determine home affordability.
Non-Housing Debt
DTI may seem hard to calculate but in fact it is not. All you have to do is combine all the recurring payments. i.e. car loans, credit card purchases, monthly child care etc. However, non-debt payments like utility bills, phone bills and memberships fees are not part of this equation.
If you are having difficulty in calculating your debt to income ratio, then you can obtain a free credit report. This report can be taken from all three bureaus i.e. Experian, Equifax and TransUnion once per year.
Forecast Housing Costs.
After you are done with the first part, it’s time to forecast your house payments. The lender will also be doing exactly the same. They want to estimate how much you will be paying down the road.
The following things will be part of your future house payments
- Principal
- Interest
- Mortgage costs
- Property taxes
- Homeowner insurance
- Homeowner association dues
Use mortgage calculator to determine your interest and payment
Calculate All Your Income:
There are a lot of deductions that take place on income. Medicare, social security taxes, 401k etc. are deducted from gross income. Workers are left with actual income after all the deductions.
In order to answer the question “how much house can i afford?”. you will have to see things from the eyes of a lender. Lenders take into consideration the gross income rather than actual income for their qualification process.
Different percentages are used by lenders for qualifying your income for mortgage e.g. only seventy five percent of rental income is considered part of your gross income.
Self-employed people will find it hard to come up with a figure. e.g. total business income gets reduced with write offs by the lenders.
Non-salaried people can use the income analysis provided by lenders during pre-qualification analysis to determine the probability of securing a mortgage.
The 43% Limit:
43 percent is a thumb rule for capping the debt to income limit but this is not applicable everywhere. E.g. Fannie Mae’s Home Ready program has maximum debt to income ratio of 36%. So there are exceptions to this rule.
Borrowers who are above the loan maximum debt to income limit can target lower priced homes. This will reduce the debt to income ratio and increase their changes of securing a mortgage.
The debt to income ratio will tell you about what you will be paying in the time to come. Keep your DTI ratio in a sustainable limit. Use DTI as a guide to determine a mortgage that you can pay comfortably.
