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Your "debt to income ratio" is a ratio used by a lender to examine how much debt (both housing and non-housing debt) you have in relationship to the income you earn.
The debt to income ratio (or, debt vs income ratio) is a comparison of your gross (pre-tax) income to your housing and non-housing expenses and debt obligations. Non-housing expenses would include such long-term debts as car loans, student loan payments, credit cards, other installment debts, alimony, or child support.
It's easier to calculate this number if you are a salaried employee. Lenders have guidelines on what income they consider if you are compensated by commission, under a contract, or for any other non-salaried employment.
And, the lenders have guidelines with regard to how much and what they consider for your long term debts such as credit card debt and which debts are considered long term (generally, if you are paying off the loan within six months, it is not considered).
According to the FHA guidelines, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with other non-housing expenses, should total no more than 41% of income.
The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
Therefore, you will want to check directly with a lender or with several lenders to get information specific to your situation so that financing can be obtained for your purchase.
In this changing real estate and financial environment, we strongly advise you to consult with a lender, tax, or financial advisor, etc. with regard to your personal situation. This is an important purchase, be educated!
A lender will calculate this ratio for you, and each lender has an acceptable range that you must fall into before they will consider lending money to you to buy a home.
As part of preparing yourself to own a home, you should be able to answer the following questions:
1. Do you have a steady source of income/job). Have you been employed on a regular basis for the last two to three years.
2. Do you pay your bills on time.
3. What outstanding long-term debts do you have such as student loans, car payments, etc.
4. Do you have the down payment funds saved.
5. Are you able to pay a monthly mortgage payment, plus homeowner's insurance, real estate taxes, homeowner's association fees, etc.
6. Do you have additional funds saved for unexpected personal costs plus the cost of home ownership (repairs, maintenance, etc.).
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