Home Mortgage Terms You Should Know: Ratios
If you are looking for a home mortgage loan, you need to
have a basic understanding of the terms that are relevant
to home loan lending. Through this article, you are presented
with an overview of one of those terms: ratios.
A Basic Definition of Ratios
After your credit report, the absolute most important factor
an underwriter will look at are mortgage debt ratios which
are frequently referred to as front and back ratios and
are expressed as "28/36".
The first or front ratio is your total monthly principal,
interest, taxes, and insurance, housing expense divided
by your total monthly pretax income.
The second or back ratio is your total housing expense plus
all other monthly debt divided by your total monthly pretax
income. For ratio calculation purposes, credit card debt
uses the minimum monthly payment. Also, if you have installment
debt such as a car payment or installment loan with less
than 10 months remaining, they can ignore the debt for qualification
purposes.
Traditional Underwriting and Ratios
Previously traditional underwriting restricted you to 28/36
ratios. These days will see progressive lenders have what
is called electronic underwriting. These computerized programs
have the ability to analyze your credit history, job stability,
cash reserves, etc. and the ratios can go clear up to 40/49
for well- qualified borrowers. This is a good reason to
work with a qualified loan officer that will do a thorough
pre-qualification for you.
Questions for the Homebuyer
A prospective homebuyer must then answer many questions
when making the decision to purchase a home but the most
important must be “how much home can I afford?”
Previously the rule of thumb was that you should shop for
a home worth about two and a half times your total household
annual gross income. But today with low interest rates and
the ability to put as little as five percent down means
homebuyers have much more flexibility when it comes to purchasing
a home.
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