If you and you spouse earn $10,000 per month, does it make sense to you that you can not afford a $10,000 per month mortgage payment? Of course you can not. You would certainly be able to afford a $2800 ( PITI ) per month payment. Your house payment would be 28% of your gross income.
The bank figured out a long time ago that most people will make their house payment if the total house payment is less than 28% of their total income. This is called housing expense ratio. The bank wants your house payment to be less than 28% of your income. If your gross income were $5000 per month, the bank would want your maximum house payment to be $1400 per month.
This seems simple enough. There is another factor. It is called total obligation ratio. The way this works is the bank is concerned with your total monthly recurring obligations.
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| Qualifying ratios are important when getting a morgage |
Let's go back to our hero that is earning $10,000 per month gross between him and his spouse. The banks wants ALL of his payments to be less than 36% of his gross income.
Let's assume he is driving a car with a $300 a month payment . His wife has a $200 per month car payment also. His Visa card has a minimum payment of $100. His Kohls credit card has a minimum payment of $100. His Macys credit card has a minimum payment of $100. His Sears credit card has a minimum payment of $100. The payment on his boat is $200 per month.
He applies to the bank for a mortgage loan to buy a new house. The bank takes his $10,000 per month income and multiplies it by .36. The maximum total obligations that our hero can qualify for is $3600. Our hero has $1000 in obligations already. The bank subtracts the $1000 from the $3600. Our hero can qualify for $2600 per month , not $2800 based on his housing expense ratio.
Due to his other obligations, he can only qualify for $2600 house payment. This is called total obligation ratio. http://rondclimer.blogspot.com/2015/01/qualifying-for-real-estate-mortgage-in.html Here is a link to more insight.
How can he get the house that he wants that costs $2800 per month? He can put more money down to lower his monthly payments or sell his boat or pay off a couple of those credit cards.
Debt is the biggest problem in qualifying for a mortgage loan. If you are planning on buying a house soon, start paying off debt and incur no new debt.
If you live anywhere near Hendersonville, North Carolina and want to buy a new house, call me at 828 755 6996 . I will get you started. If you are interested in a career selling real estate, our company, Keller Williams Realty is looking for new real estate agents. Contact me at www.firstrealestateschool.com I can get you started with that also.
Great advice, Ron, thanks!
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