November 27, 2018
How much home can you afford? If you’re looking for an FHA mortgage or any other type of home loan, one important factor both you and your lender will be concerned with involves the amount of current debt you have compared to how much you would need to pay if your mortgage loan is approved.
Licensed lenders and competing banks don’t have identical requirements in this area, but in general you should plan on doing two basic types of mortgage loan calculations to determine how much home you can afford to buy.
FHA Home Loans And Your Debt-To-Income Ratio
One type of calculation involves the percentage of your gross income that the new loan would require each month on the mortgage payments.
You will need the projected amount of a new house payment, plus the amount of your gross monthly income or a borrower and spouse’s combined monthly gross income.
Divide the house payment by the gross monthly income numbers to arrive at a debt-to-income ratio for the mortgage alone. For best results the number should be a percentage in the low 30% range.
A Second Debt Ratio Calculation You Will Definitely Need
The second calculation you need to make is to take your gross monthly income the same way as above, plus the total house payment, and include all the monthly financial obligations. Total up all the monthly debt, divide the monthly debt by the amount of gross monthly income.
This percentage is your debt-to-income ratio including all financial obligations including the new home loan (assuming it gets approved). For best results the percentage here should be in the low 40% range.
Run The Numbers Before Your Lender Does
These calculations will be made by the lender; it is strongly advised that borrowers know these calculations before applying for the loan. If your debt ratio numbers are too high you will have time to work on reducing that ration before you apply.
Those who submit FHA mortgage loan paperwork without knowing their debt ratios run the risk of missing out on the chance to make their application stronger by working on the ratios prior to the lender’s calculations.
If your debt ratios are high or seem to push the boundaries of what may be possible for home loan approval, ask your lender if compensating factors (provided by the borrower such as a larger down payment or large cash assets) may help your chances at loan approval.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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