Before you begin looking at purchasing a home, it is important to consider your debt to income ratio. This is one of the first things a mortgage lender will look at when apply for a home loan along with your current credit rating (the ratio also has an impact on your credit rating).
Debt to income is a very simple calculation and is derived from the amount you pay out to bills each month versus the amount of your take home salary. Lenders will calculate this ratio in order to determine whether or not you will be financially able to handle the added debt of a mortgage.
Doing the math: It is a simple calculation, add up your monthly expenses (such as your car payments, minimum credit card payments, loan payments etc, note: you don’t include things like groceries or utilities). Add your expenses and payments (your mortgage payments plus, mortgage insurance, home insurance and property taxes) and divide the total by your gross monthly income.
Note: When shopping for a mortgage is that your debt-to-income ratio should be no higher than 36%. Anything above this could mean you’ll be denied credit or charged a higher interest rate on your loan.
It should be noted that it is advisable to ensure that your total house hold expenses do not exceed 28 percent of your total take home salary (though there are exceptions). Remember that the lower your debt the better debt to income ratio you will have, making your chances of receiving a better interest rate on your mortgage much higher.
Use the following calculate your debt-to-income ratio: *Minimum monthly credit card payments: + Monthly car loan payments: + Other monthly debt payments: + Expected mortgage payments: *Total = *Your debt-to-income ratio is: *Your total by your monthly gross income =
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