Ever wonder about those terms us lenders use to qualify you on income? I’m going to try and explain those to you and let you know what the guidelines are for both conventional and government programs.
The total payment to gross monthly income is the first income qualifier. That would be your new principal and interest payment monthly plus homeowner insurance monthly, real estate taxes monthly, and any mortgage insurance monthly. Now since insurance and taxes are typically done on a yearly basis, you would need to divide that figure by 12 months to get the monthly amounts. So let’s look at a $200,000 purchase price with 10% down conventional at 3.625% interest for 30 years. The principal and interest payment would be based on a $180,000 loan amount. That would be $820.90. Let’s say homeowners insurance is $400.00 a year. That would be $100.00 per month. Then let’s say mortgage insurance is $75.00 per month. So we add those all together to get the total payment, which in this case would be $1,029.23 per month. Let’s say our borrower makes $50,000 per year, which would be $4,167.67 per month. So to get our first ratio we would take the $1,029.23 and divide it by $4,167.67 and that would be 24.6%.
The second ratio would be our debt ratio. We would take the above monthly payment and add any monthly debt off of the credit report, such as car loans, credit cards, student loans, and personal loans. So let’s say our borrower has 2 credit cards with $25.00 monthly payments each, and maybe a car loan of $170 a month. So then we would take that house payment of $1,029.23 and add $50.00 plus $170.00 for a total of $1,249.23. We would then take that amount and divide it by the gross monthly income of $4,167.67 and that would give us our debt ratio of 29.97%.
Conventional Guidelines are 28% – 33% for total payment to income and 36% – 45% for total debt ratio. So based on that, our borrower would qualify on an income basis.
Government Guidelines are 29% for total payment and 41% – 43% for total debt ratio. Hopefully this helps take the mystery out of income qualifications.
I can also be contacted at:
Dependable Mortgage Co.
Rhonda Sherman, Owner
License #100008357 NMLS #381084
145 Grand Avenue, Suite B
Grand Junction, CO. 81501
Office: (970) 257-1502 Cell: (970) 250-8613
Website: Dependable Mortgage Co.
Regulated by the Division of Real Estate
An Equal Housing Lender