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Monday, February 2, 2009

Using Debt to Income Ratios to Determine Buying Power

By Van Whalen

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.

For any income determinants the mortgage company uses you gross income.

For FHA loans lenders like to see the ratio of the monthly payment of the house, including taxes and insurance, not exceeding 29% of your monthly gross income.

A thirty-three percent front end ratio is generally used as a basis for conventional loans.

For a lender to determine loan payment amount a prospective borrower must qualify on the front and back end.

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.

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.

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 part time, and you can add many etc's here.

If you want to get a feel for the least a lender will offer you for income would be to average your tax returns for 2 years and divide by 24. This will be a start if you fit into the latter categories.

Most hate me for saying that to them, but lenders look at facts when determining how much they will lend to you. Especially today with all the financial turmoil.

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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