Many people these days are looking to purchase too much home for what they can afford. Buying a home for $400,000 when your house hold income is only $30,000 does not make sense and it has to do what’s called your debt to income ratio. Most people do not qualify for their dream home because of this. How does the debt-to-income ratio work?

The debt-to-income ratio indicates how high your debt is as compared to your income. The higher the ratio, the higher a credit risk you are. The ratio is a calculation of your total monthly debt payments divided by your monthly gross income.

Example:
Total debt payments = $600
Total monthly income = $3000
Debt to income ratio = 20% (600 / 3000)

The acceptable debt-to-income ratios and calculations vary slightly among lenders (some include the sought-for mortgage in their debt payment totals.) However, even if your debt load is high, an excellent credit history (or credit score) can make it possible to qualify for a mortgage loan.

Along with considering your debt-to-income ratio, a lender will analyze your income and debt based on a qualifying ratio that is assigned to each type of loan. This ratio is a debt limit guideline to help determine if your income is sufficient in view of the loan you would like to obtain, first, for housing expenses only (including payment, taxes, insurance and fees) and, second, for recurring debt along with housing expenses. The standard qualifying ratio for a conventional loan is 28/36; an FHA loan usually has a higher qualifying ratio of 29/41. A higher ratio allows for more of your gross monthly income to be applied to each debt category. There are those few loan programs where your DTI (debt-to-income) ratios can be in the 50% range. Also I would like to note that there are loan programs called “no ratio” where the underwriter throws out the DTI and won’t even consider it in his/her decisioning of the loan.

I would recommend calling a trusted mortgage planner and be preapproved before you go home shopping. Know what you’re comfortable with paying monthly and then find the home you can afford.

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