To understand how much home you can purchase is really a function of the payment of the home, your income and your current debt load. To know these items you can plug them into a formula to help you make the determination.
Mortgage companies use two separate ratios to make this determination. The first involves your income relative to the house payment.
The first thing the lender determines is how much gross income you make on a monthly basis.
The front end ratio has to do with the house payment in relation to the gross monthly income. For government loans this ratio should be no more than 29%.
Conventional loans work the same way except their front end ratio raises to 33%.
For a lender to determine loan payment amount a prospective borrower must qualify on the front and back end.
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%.
You probably say to yourself, “this is pretty easy. I’ll just add and divide and that’s that.” Not so fast. The tough part about this making the correct determination of income.
Now, you may be lucky and get a salary. Well heck, just divide by 12 and you have a monthly income.. It’s not so easy for the rest.
It runs the gambit from construction workers who make money based upon the economic environment, to hourly workers, to commissioned based folks who write off everything under the sun on their returns.
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.
If your situation didn’t fit in my explanation bite the bullet and call a loan officer. Otherwise you can use this info as a rule of thumb.
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