When it comes to homeownership, how much you can afford directly relates to how much debt a lender thinks you can take on monthly.
In this blog, we’ll go over what it takes as you start your search for your dream home.
When we’re evaluating your loan application, one of the most important factors is your debt-to-income ratio. This ratio is calculated using your total monthly debts divided by your total gross monthly income.
There are two ratios that your lender will look at. The top number and the bottom number. The top number represents your housing ratio. This is the ratio that your proposed total mortgage payment (principle, interest, taxes, insurance) is relative to your total monthly income. The bottom number represents your proposed total mortgage payment plus all of your other monthly debts. Depending on your credit score and program choice, your DTI (debt-to-income) could be higher or lower.
Depending on what programs are available to you will determine how much of a down payment you’ll need to save up for.
Calculating your DTI
If your proposed monthly mortgage payment (PITI) is $1200 a month and your income is $5600 a month gross, your DTI would be 21%. ($1200/$5600 = 21%.
Whether you’re thinking about buying, shopping for a home, or have found the home you love, getting a pre-approval is paramount in helping you make a great decision both financially and practically.