How Much do You Qualify For?

Lenders use calculations, or ratios, to determine the level of housing and overall debt, which can realistically be carried by a borrower.

Debt ratios are calculated from gross monthly income and monthly debt figures. Borrowers can generally afford to spend no more than 29% of their gross monthly income for housing debt and 45% for overall debt (36% - 50% is the possible range). Every mortgage approval is different, so only rely on this as a guide, every approval is tailored to credit, down payment, reserve assets, etc.

To determine the amount YOU qualify for, we will use the Housing and Debt Ratio Worksheet below. You will need to understand some terms used on the form first.

Gross Monthly Income

This is your total stable and verifiable income from all sources. This is the amount before taxes and insurance premiums are deducted.

Net Income

This is what is left of your gross income after taxes, insurance premiums, and other deductions. Essentially, this is your take-home pay or money that comes into your household from all sources (including AFDC, Social Security, etc.).

Monthly Installment Debt

This is an account that has a specific term (length of time to repay) and a set payment per month.

Revolving Debt

These are accounts where the balance and the monthly payment may change each month. Credit cards are examples of revolving debt.

Housing Debt Ratio

This ratio determines the amount of gross monthly income that can be applied to principal, interest, taxes and insurance. Many lenders use 29% as the maximum for the housing debt ratio.

Total Debt Ratio

This ratio determines the amount of gross monthly income that can be applied to all monthly debts, including housing. This includes things like car payments, finance company bills, credit card payments, and any debt that has more than 10 payments left.

The maximum percentage used by lenders is generally 41%; however, strong credit scores or strong assets can allow a borrower to exceed 41%. Qualifying for up to 50% is not uncommon.

A person coming out of bankruptcy, foreclosure, or a short sale is likely going to top out around 36% Debt-To-Income as a worst-case scenario; whereas someone with great credit and asset reserves may go up to 50%.

These are the four parts of a mortgage payment:

PITI
P: Principal
I: Interest
T: Taxes
I: Insurance (includes Hazard and Mortgage Insurance)

The amount that is paid monthly for taxes and insurance is usually put an escrow account. Homeowners Association dues (HOA) are paid separately to the property management company and are not part of the monthly mortgage payment, although it is used in qualifying.

Housing and Debt Ratio Worksheet

Borrower’s Gross Monthly Income   $2,000
Co-Borrower’s Gross Monthly Income   +$1,000
Total Gross Monthly Income $3,000

Monthly Debt Payments:
Car Payment                                           $350
Credit Card Payment                              + $25
Total Monthly Debt Payments   $375 (A)

Housing Debt Ratio:
Gross Monthly Income                           $3,000
Housing Debt Ratio                                 x 29%
Estimated Monthly Housing    $870 (B)*
Total Debt Ratio:
Gross Monthly Income                           $3,000
Total Debt Ratio                                      x 41%
Estimated Total Monthly Expenses $1,230 (C)

Available Income Indicator:
Estimated Total Monthly Expenses   $1,230 (C)
Total Monthly Installment & Revolving Debt   -$375 (A)
Available Housing Income $855 (D)*

*The amount a borrower can spend on principal, interest, taxes, and insurance (PITI) is the smaller of lines B or D.

Housing and Debt Ratio Worksheet

Borrower’s Gross Monthly Income         _____________________

Co-Borrower’s Gross Monthly Income +_____________________

Total Gross Monthly Income =_____________________

Total Monthly Debt Payments =_____________________ (A)

Housing Debt Ratio:

Gross Monthly Income                            _____________________
Housing Debt Ratio                                 x 29%

Estimated Monthly Housing Expense =___________________ (B)*

Total Debt Ratio:

Gross Monthly Income                           _____________________
Total Debt Ratio                                      x 41%

Estimated Total Monthly Expenses =_____________________ (C)

Available Income Test:

Estimated Total Monthly Expenses     _____________________ (C)

Total Monthly Debt Payments -_____________________ (A)

Available Housing Income = _____________________ (D)*

*The amount you can afford to spend on principal, interest, taxes, and insurance (PITI) is the smaller of lines B or D.

Are You Ready?

Buying a home requires a lot of financial considerations:

Qualifications are based on gross income, not take home.

It is important to realize that just because a lender approves you for a specific loan amount, only YOU can determine if YOU can afford the monthly obligation.

Always get a fixed rate mortgage, an adjustable rate mortgage carries the danger of increased payment later and makes budgeting more difficult since the rate can go an increase up to 5% over the life of the loan from where it started.

The best way to see if a mortgage is affordable is to ask yourself…

How much am I paying in housing now?

How much am I paying in utilities now?

What will be the monthly difference when I buy to what I am paying today?

Always assume there will be minor repairs/costs, budget for $100 a month in housing expenses for

pest control, weed control, landscaping, the unknown, etc.

Can I set aside the increase into savings for 6 months prior to buying the property to see if I really can afford it?

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website