Mortgage lenders use a variety of calculations. Even the lenders who use the same type of calculation may interpret the results differently. Here are some of the most popular calculations.
• Lenders look at the total of your debts and compare that number to your gross salary (salary before taxes are taken out). Mortgage lenders do not want the borrower to carry debts (including the mortgage payment) larger than 30–40% of your total gross salary. This is your debt-to-income ratio. Debts include credit card debts, auto loans, student loans, spousal support, child support, and housing expense. Housing expense is the mortgage payment that includes homeowners’ insurance premium, real estate taxes, and mortgage insurance premium.
• Lenders may follow the Federal Housing Authority’s (FHA) recommendations that a person’s mortgage payment should be no more than 29% of his or her gross income. The other part of the FHA recommendation is that the mortgage payment plus a person’s other expenses (long-term debts) should total no more than 41% of his or her gross income.
Some lenders use what is called a housing expense ratio. Using this calculation, a person’s monthly mortgage payment should
be less than or equal to one quarter of
Calculators for determining how much you can afford:
his or her monthly gross income. Again, gross income is before taxes.
• Here is where we insert a reality check, these calculations are not strictly followed even in the current buyer’s market. Whatever math the lender does, lenders also scrutinize a person’s credit history and credit score. In addition, the lender looks at the amount of down payment, and closing costs for a particular property.