Yesterday we addressed how important your credit score is when it comes to mortgage financing. Today we will look at what may be the most important aspect of getting mortgage financing: your debt to income ratio.
Debt to income ratio
Your debt to income ratio is a number (usually expressed as a percentage) that illustrates how much debt you have in relation to your gross monthly income. Here's a breakdown of how it's figured out:
Your income is $60,000 per year. This makes your monthly income $5,000. Your total debt payments are $1,500 per month. 1,500/5000=0.3. Multiply 0.3 by 100 to get 30%. Your debt to income ratio is 30%.
28/36 qualifying ratio
In addition to your deb to income ratio, there is what is known as the 28/36 qualifying ratio. You must meet this in order to get the best terms on your loan. This means that your debt to income ratio without housing payment should be no greaer than 28% and your debt with the new mortgage payment should not exceed 36%.
In our example, above, if the obligations on the income included housing, then mortgage financing would be approved. The 30% represented the debt to income ratio without housing payments, then it would be tougher to get a loan. The borrower would probably have to settle for a subprime loan.
It is important to note that since the subprime lending crash, more and more lenders prefer the 28/36 qualifying ratio.
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