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Mortgage Lenders use Housing Ratios as one of the factors to determine mortgage credit worthiness. The Income Ratio or top ratio is your total monthly mortgage payments divided by your total gross monthly income. The housing monthly payment is also referred to as PITI (Monthly Principal, Interest, Taxes and Insurance). Total income is derived by adding you and your spouse/co-borrowers monthly gross incomes together. Example: To calculate Income Ratio
Your monthly Income $3700 (from pay-check stub) Co-Borrower income 3700 (from pay-check stub) Total Income $7400
Income Ratio = $2415 /$7400 = 32.6%
The Debt Ratio or bottom ratio is your total monthly obligations divided by total gross monthly income. Total monthly obligations include PITI plus all additional debt stated as monthly payment for credit cards, auto loans , student loans, etc. The monthly credit card payment is calculated by multiplying the total of all revolving credit by 5%. FANNIE MAE uses a conservative 5% of unpaid balance on credit cards as the guideline calculation for this minimum monthly payment. Example: to calculate Debt Ratio
These Housing Ratios are expressed as 32.6% over 38.2%. Lenders want to see that your debt ratio does not exceed 40% …or that 40% of your income goes to living expenses. The lender is really looking out for your best interests by not giving you a loan that is too expensive for you to pay. You do need your remaining gross income for food, savings, misc. expenses and Federal and State taxes. You can go as high as a 45% Housing Ratio with special circumstances in your loan package such as high cash reserves, long job stability, high FICO score, low LTV, etc. 1998-03 Copyright, Disclosure and Privacy Policy EagleLending.com
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