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When planning your next home purchase, it is important to know ratios are used by mortgage companies to determine how much you can afford for a mortgage payment. Two different ratios are used to make this determination:
Debt to income ratio
Housing to income ratio
Debt to Income Ratio
Your debt to income ratio is determined by calculating your total amount of monthly debt obligations, including your monthly mortgage payment as well as other payments such as:
The total monthly debt is then compared to your total income to arrive at a ratio. For example, if you earn $3,000 per month and have $900 in monthly debts your debt to income ratio is 30%.
Housing to Income Ratio
The housing to income ratio consists of all your housing costs in relation to your income. Housing costs include:
An individual with monthly housing costs of $960 and a monthly income of $3000 would have a housing to income ratio of 32%.
If, after, calculating how much you would need to earn to qualify for the purchase price of your desired home, you realize you may not earn enough, be aware there are ways you can rectify the situation. Maximum ratios are determined by each individual lender. Some lenders allow higher ratios than others. MortgageLenders.org can help you find a variety of lenders to meet your financial needs.