Lenders Lend X Amount Based Upon These Ratios
So, you want to know how much home you can afford. What I want to outline to you in this article is how lenders determine this. You don't necessarily have to speak to a loan officer to find out.
For a bank to loan money they determine your maximum house payment firstly by what is known as the front end ratio.
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%.
Convential mortgages are a bit more liberal in they will approve a thirty-three percent of the gross income.
To qualify for either type of loan you must qualify not only on the front end ratio but the back end as well.
The back end ratio is a compilation of all your monthly debt payments. Add your new house payment to those monthly debts and this percentage is your back end ratio.
You garden variety conventional will all a thirty three percent back end. FHA, as much as forty-one percent.
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.
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.
What if you are self employed for 1.4 years? Maybe you are a traveling nurse and have been in town for six months. Maybe you get lots of overtime.
Others work part time, and you can add many etc's here.
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 you really have no idea of how to factor your montly income you should consult with a mortgage professional. Good luck out there purchasing your home.
For a bank to loan money they determine your maximum house payment firstly by what is known as the front end ratio.
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%.
Convential mortgages are a bit more liberal in they will approve a thirty-three percent of the gross income.
To qualify for either type of loan you must qualify not only on the front end ratio but the back end as well.
The back end ratio is a compilation of all your monthly debt payments. Add your new house payment to those monthly debts and this percentage is your back end ratio.
You garden variety conventional will all a thirty three percent back end. FHA, as much as forty-one percent.
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.
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.
What if you are self employed for 1.4 years? Maybe you are a traveling nurse and have been in town for six months. Maybe you get lots of overtime.
Others work part time, and you can add many etc's here.
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 you really have no idea of how to factor your montly income you should consult with a mortgage professional. Good luck out there purchasing your home.
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