You are currently mulling over whether you should be purchasing a home and how much a lender will approve you for a mortgage. You can make a rough calculation of the monthly payment and then extrapolate that into an actual loan amount.
For a bank to loan money they determine your maximum house payment firstly by what is known as the front end ratio.
The lender will use your gross monthly income to determine your front end ratio.
Convential and FHA mortgages work slightly differently. Relative to the gross income the total house payment should not make up more than twenty nine percent for FHA.
Conventional loans work the same way except their front end ratio raises to 33%.
To qualify for either type of loan you must qualify not only on the front end ratio but the back end as well.
Mortgage companies factor the rear end ratio in a simalar manner to front. The only real difference is instead of comparing income to just the house payment it is compared to the house payment plus all other monthly debt payments.
Conv. mortgages will allow a ratio in the 38% range. Government mortgages allow up to 41%.
Where you can get into a little trouble in determining these ratios is factoring the proper income. Factoring monthly debt is a piece of cake comparatively.
A lucky few are fortunate enough to be on a monthly salary. You can count on that to come in and so can a lender. For others it is more difficult to determine.
Many people are on a 1099 as contract employees. Some are self employed and make a bunch of money but it doesn’t necessarily show up on a tax return.
Others work seasonally and the list goes on and on.
If you have odd ball income.. That means you Mr. Self employed or commission guy, you should use your two most recent tax returns as a basis. Take the adjusted gross income and average for twenty four months.
It is a shame that mortgage companies require the use of tax returns like that. We all know you make quite a bit more money than what is shown.
Once you come to some conclusion here you should still seek the advice of a good mortgage lender. I wish you the best in your next home purchase.
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