Facebook Twitter Instagram
    Mortgage.info
    • First Time Homebuyer
    • Loan Programs
    • VA Programs
    • Refinancing
    • Beyond the Mortgage
    Mortgage.info
    Home»Buying a Home»How Much of Your Income Should Go to Your Mortgage?
    Buying a Home

    How Much of Your Income Should Go to Your Mortgage?

    JustinBy JustinMarch 19, 2017No Comments4 Mins Read
    Facebook Twitter Pinterest LinkedIn Tumblr Email
    Share
    Facebook Twitter LinkedIn Pinterest Email

    How Much of Your Income Should Go to Your Mortgage?

    Your debt-to-income ratio will help answer that question. This metric measures the percentage of your monthly income that should go toward your mortgage backing your first home purchase that is affordable for you. Mortgage reforms encapsulated by the Dodd-Frank Act aim to help you and other consumers be aware of the limits on how much of your income should go to your debt by requiring lenders to look at your DTI based on set standards.

    Seek and you shall find mortgage lenders here.»

    The Debt to Income Ratio

    Lenders use the debt-to-income ratio to determine if (a) you are able to take on another debt given your current income and (i) you are able to repay this debt in the future.

    There are two ways to calculate this DTI ratio. There is the front-end, which takes into account your total housing costs divided by your gross monthly income. Then there’s the back-end or total ratio which is all debt obligations including housing costs relative to your gross monthly income.

    In the case of mortgages, lenders will focus more on the front-end ratio. In calculating this ratio, they will include future payments on the mortgage you’ll be taking on.

    The Ideal DTI: Your Mortgage vs Your Income

    Under the Dodd-Frank Act, lenders are required to assess the borrower’s ability to repay his/her mortgage based on credit scores, DTI and so on. If lenders are doing their part, they should be able to make a qualified mortgage which is free of harmful and risky features.

    A QM, for example, has a total DTI ratio including the mortgage payments of 43% at the very most. Even with this 43% threshold, lenders generally require a more stringent DTI ratio of 28%. This means that no more than 28% of your monthly income should go to your mortgage payment every month.

    Obtain multiple rate quotes and compare.»

    Say you’re making $4,648 every month. Twenty-eight percent of this amount is $1,301 ($4,648 multiplied by 0.28). This is your ideal mortgage payment, anything greater than this could be burdensome unless you are expecting a pay raise, promotion, or a windfall perhaps later on.

    To You, How Much Can You Really Afford?

    From a lender’s point of view, the debt-to-income ratio tells your ability to manage your debt. The lower this ratio, the “more able” you are in managing your debt. If your DTI is too high, you are likely at risk of not being able to pay off your debts.

    What you can do is to free up your debts before submitting your mortgage application and avoid taking on a new one, unless necessary.

    From your end, you can use the 28% benchmark to determine the mortgage debt you can comfortably take on. In calculating your projected mortgage payment, take note of its main components: loan principal, loan interest, property taxes and homeowner’s insurance.

    If you plan to put less than 20% of the home’s purchase price, include the costs of a mortgage insurance as well. You can obtain quotes from multiple lenders, insurers, and local taxing authorities to help you come up with a more realistic calculation.

    In the event your debt ratio exceeds lender standards because of student loans perhaps, you can still find a mortgage. FHA loans allow for a front-end ratio of 31% and non-qualified mortgages like stated income loans have a more relaxed stance toward DTI scores.

    The key is to use certain factors to downplay your high DTI and make up for it. These compensating factors include putting a higher down payment, maintaining an excellent credit score, or setting aside funds worth more than six months of mortgage payments.

    Let’s help you find a suitable lender for your home purchase.»

    Justin
    + posts

    Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

    • Justin
      https://mortgage.info/author/justin/
      House Bill Adjusts HMDA Requirements for Small Lenders
    • Justin
      https://mortgage.info/author/justin/
      Senators Propose Measures to Protect Consumer Data Post-Equifax Breach
    • Justin
      https://mortgage.info/author/justin/
      HUD: $2-Bil. Funding to Fight Homelessness in Local Communities
    • Justin
      https://mortgage.info/author/justin/
      What Does the New Year Hold for HELOCs? Projections, Rates in 2018
    debt-to-income ratio Dodd-Frank Act DTI homeowners' insurance income interest mortgage payment PITI principal taxes
    Share. Facebook Twitter Pinterest LinkedIn Tumblr Email
    Justin

    Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

    Related Posts

    The 4 Questions You MUST Ask Before Hiring a Real Estate Agent!

    December 10, 2022

    The ABCs of Home Buying: How Much House Can You Afford?

    November 24, 2022

    Renting vs Buying: Which is Best for You?

    November 17, 2022
    Mortgage.info
    © 2023 Mortgage.info Designed by ThemeSphere.

    Type above and press Enter to search. Press Esc to cancel.