A common question in the home buying process is how much can I get pre-approved for? The formula lenders use in qualification is called debt to income ratio know as DTI which is your monthly debt divided by your gross income, income before taxes are taken out. Their are two debt to income ratio the front and the back end.
The first part being your housing expenses Mortgage payment, Taxes, Insurance, PMI, and condo fee. Lender want the front end ratio under 29% because you never want one liability too high in comparison of your income.
The second part being your housing expenses plus your monthly obligations. These payments are expenses like minimum monthly credit card payments, student loan payments, alimony, child support, car payments, etc. Your lender will add up all your monthly installment and revolving debts in addition to your estimated monthly mortgage payment and housing expenses and divide that number by your monthly gross income. Lenders typically want the ratio 41% or less even though you can get approved slightly higher depending on compensating factors.
It is extremely important to remember you never want your total housing expenses and debts too high because it is not always possible in the future to refinance or sometimes even sell your home.
How does Debt to Income Ratio effect my lifestyle?
If your back end ratio is over 41% No vacations for you If Your back end ratio less than 35% one week vacation If Your debt tom income ratio less than 30% two weeks of vacation If Your debt to income ration is less than 20% You probably have a really big house and will have lots of vacations .
If you have any questions please do not hesitate to contact me - Boston Mortgage Lender & Home Loans