My confusion is with the income to debt ratio? Is there a magic formula to figure out on my own what we would qualify for?
Here are our hypothetical details 
My husband works(I do not) and before taxes he makes 1534 on each paycheck(he is paid weekly) We have about 1230 bills each month- truck payment, insurance(s), phones, water, electric etc. (We pay 1100 in rent but as we are trying for a home loan does that factor in anywhere? Our credit will allow us to get a 1st time buyer FHA loan). So what math formula do I need to find our what we qualify for? Is there a formula?
Thanks to anyone who helps, with something so important I want to know everything I can before I go talk to a loan agent :)
Oops– I guess it would be helpful to also hypothetically say we owe 18,000 on our truck but have no other debt.
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Call a bank or lender in your area – even a Real Estate agent could help you out. Your credit score has a lot to do with it also. The rule is around 1/4 of your take home pay for mortgage.
The magical housing debt to income number is 31%. You shouldn’t spend more than 31% of your gross income on your mortgage payment. Another way to look at it is to take the yearly gross, and multiply it by 2.5. So at $80K a year, you can theoretically afford a mortgage of $200K. Most lenders will want 10-20% down payment.
hello,
First thing you should do, is to get your credit history or fico score. This could be bought in the internet for some, 40 dollars, if you get it from the bank, maybe 30 dollars for just one credit score. Usually for three: equifax, transunion and the other one (which i forgot at the moment), are the only 3 company that give out credit report.
To get this, you have to give some information to them. Eloan.com, creditreport.com or from the bank. You will wait for it and it will tell you how much money you can be approve of. You don’t need to do some calculation yourself although it will help if you will know the calculation but that is a bit complicated because you have buy a realestate book to be able to get it. Realtors will not give you the formula if they know because that is not their job. Loan officers will not give you the formula because that’s their way of living. Some might give it to you, but might not be complete, because there are other people who are working on it. the Loan Processor and the underwriters.
But anyway, If you and your husband have no late payments, no other loan (car loans) where sometimes are late in payments, your husband has a steady job and you have 6 months worth of money (of $2,000.00 monthly house payment multiply by 6) in your savings not included the money that you are going to put as down payment, your loan application will be in good hands. This is called reserve. This is going to be used pay the monthly payment for the house just in case your husband lose his job and has to wait 3 months to get a new job. After 3 months and still not a job around, the lender will be sure you will foreclose the house on them.
Rule of thumb is, let’s say after all salary deductions, your husband’s take home pay is 5,000.00 every month, your monthly regular expense is $1,500.00, (including miscellaneous expense budget – the “just in case” something happen kind of budget). You will have a leftover of $3,500.00.
Assume that the house your are targeting to own will have a monthly payments of (depends on how big the house you want to invest), and depends on how much down payment you are going to put – the bigger downpayment the lower the monthly you have to pay. also depends on how low the interest rate you will take – lets say say $2,200.00, then you will have $1,300.00 left. That will be a good budget or ratio.
Depend on how much house you are buying, the location, how many bedrooms and bathrooms in house, with or without view, those all counts on how much loans you will be approved. I hope this help.
I am not sure of the exact formula but we have a high debt to income ratio so this is what my agent did.
Added up all payments that show on our credit report. I don’t think they count gas, electric etc (at least they did not in our case).
For the sake of making it easy to explain lets say the credit debt equals $500 per month and you husband makes $3000 per month.
you have to have less than a 50% debt to income rate including your mortgage. Half of $3000 is $1500 (this is the amount of money you will have to cover your mortgage and credit bills), deduct the $500 worth of the credit bills and you have $1000. So you will need to find a house that with mortgage, insurance and taxes will be less than $1,000 a month.
Hopefully that made Sense
DTI is referred to as Debt-to-Income. There are two places that DTI can limit the amount you can borrow. The first place is generally you can spend no more than 28% of your gross monthly income on the housing payment. Secondly, all of your monthly debt cannot exceed 36%. You had an answer saying that DTI could go up to 50% – that might have been true at the peak of the housing bubble, but lending up to those % is part of what caused the problem.
You need to know your gross monthly income. Is the $1534 a week his take home pay or his gross pay? Let’s assume for a second that is gross pay (it’s pretty decent, too). $1534/wk * 52 weeks per year / 12 months in a year, gives $6647 per month.
Your maximum housing payment is 28% of that or $1861 per month. Your total debt (things that show up on credit reports that are debt – car loans, student loans, personal loans, furniture, credit card minimums, etc. – not water, gas, electric, cable, etc.). 36% of the gross monthly income is $2393 a month. If the truck is really your only other debt than your truck payment won’t limit your house purchase unless it is more than (36% – 28%) or $2393 – $1861 = $532 a month.
Now that we know you can afford a housing payment of $1861 a month we can figure out how much you can borrow. The $1861 is the total for your housing payment. A housing payment has 4 or 5 components to it. There is principal, interest, taxes, homeowner’s insurance and private mortgage insurance (if you put down less than 20%).
Real estate taxes are the big wild card here. I’ve lived in areas that have ranged from ~0.5% of value per year and areas of >4% of value every year. This can make a huge difference in how much you can borrow. Let’s say the house you are looking at costs $250,000. At 0.5% of value per year the taxes are $1250 per year or ~$104 per month. At 4% the taxes are $10,000 per year or $833 a month. Remember that you can only spend $1861 a month, losing $833 of that to taxes would greatly reduce what you can borrow. The national average is somewhere closer to 1.5% per year ($313 a month in our hypothetical example).
Homeowner’s insurance can be quite variable too. If you live near a coast you might spend $2000-$3000 a year. If not, you might spend $600 a year.
Put down less than 20% and you’ll pay PMI (private mortgage insurance). The less you put down and the lower your credit score the more you’ll pay in PMI. Let’s assume a $250,000 house with 10% down – I’d guess PMI will be in the $175 a month range.
So, you had $1861 a month to spend on a house. Let’s use average type figures. You are going to pay $313 a month in taxes, $50 a month in homeowner’s insurance and $175 a month in PMI. Now your principal and interest payment can’t be more than $1323 a month. The amount you can borrow now depends heavily on the interest rate. Now I can use a simple amortization calculator (available all over the web) to determine how much you can borrow. To have a P&I payment of $1323
at 5% interest, you can borrow $246,450
at 6% interest, you can borrow $220,665
at 7% interest, you can borrow $198,857
at 10% interest, you can borrow $150,754
Your credit score will dictate your interest rate, which will determine how much you can borrow.
It isn’t straightforward, but look at it closely and you can see where I made assumptions and figured things out.
good luck!