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- Mortgage Calculations & Debt-to-Income Ratios
Debt-to-income ratios are the same to qualify for a new mortgage even if you have an existing mortgage. Two ratios are used to qualify you for a mortgage loan. The housing ratio is the percentage of your potential new mortgage payment, including monthly cost estimates for property tax and homeowners insurance as compared to your monthly income. The total debt ratio includes your prospective new mortgage payment plus your consumer debt compared to your gross monthly income.
Use an online mortgage calculator to estimate your monthly mortgage payment. Add your prospective monthly cost for property taxes and insurance, including mortgage insurance if necessary. Then divide the result by your gross monthly income. For example, if you make $4,500 per month gross, before taxes, and your estimated mortgage payment is $1,200. Your mortgage payment ($1,200) divided by your monthly income ($4,500) equals 26.7 percent. This is less than the classic maximum ratio of 28 percent to 30 percent.
Add your estimated mortgage payment, with taxes and insurance, to your consumer loan payments and divide by your monthly income. This ratio should be between 33 percent and 38 percent, with a traditional lender target of 36 percent. For example, your estimated mortgage payment ($1,200, from the previous example) plus consumer loan payments of $300 per month equals $1,500 per month. Divide your total monthly debt ($1,500) by your monthly income ($4,500) to get a total DTI of 33.3 percent. Since this is in the acceptable range, you qualify for the mortgage you want.
If you're hoping to get a typical mortgage with a down payment less than 20 percent of the selling price, you'll need to have private mortgage insurance. Should you get a Federal Housing Administration or Veterans Affairs guaranteed mortgage loan, you'll also pay mortgage insurance, both at closing and monthly thereafter. The monthly cost of mortgage insurance is used to calculate both your housing and total debt ratio. Hopefully, this additional amount fits into DTI guidelines to qualify you for the mortgage you want.
DTI guidelines are not absolute maximums. However, some lenders will more strictly adhere to the traditional 28/36 guideline maximums, 28 percent maximum housing ratio and 36 percent maximum total DTI. Other lenders, such as FHA, will employ more "flexibility" in their qualification guidelines. If your housing and total DTI are pushing the limits of the standard guidelines, you can try to find lenders or mortgage products, such as FHA or VA, that embrace flexibility in housing and total debt ratios.
DTI Qualification Flexibility
While private lenders, such as banks, credit unions and mortgage companies, seldom divulge their willingness to or refusal to allow DTI flexibility, FHA and VA are more honest. While you may not have hard facts about DTI flexibility, FHA typically permits 29 percent housing and up to 41 percent total DTI ratios. VA loans don't use housing ratios, but often allow total DTIs around 41 percent. Qualifying ratio flexibility can sometimes make the difference between mortgage loan approval and denial.
Unless you're going to keep your existing mortgage, you need not add in the current monthly payment into your DTI qualification ratios. Since your current monthly payment will go away with your new mortgage, all lenders will not use the monthly payment in DTI calculations. However, if you wish to keep this mortgage, lenders will include the payment in DTI calculations. You'll then need enough monthly income to afford both within previously noted DTI guidelines.
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