Have you talked to a real estate agent or loan originator lately and were left confused about all of the questions about your income and credit. One of the main factors that underwriters use to determine your ability to repay and qualify for all types of home loans in your debt ratio.
This is your total payments divided by your income. For example $1000 a month in payments divided by $4000 in income is .25 or 25%. This would be considered a good low number and would pass this part of the underwriting.
In our next example let’s say you have $1000 in consumer debt payments (credit cards and car loan payments) and your new proposed mortgage payment with taxes, mortgage insurance and property insurance (PITI payment) is going to be $800 and month. Now we have $1800 a month of total 
proposed payments compared to $4000 a month in gross income before taxes. This works out to 45% which is a little high. With excellent credit you could still qualify.
Many loan programs that are manually underwritten require the total ratio to be below 43%. In the example above the payments would need to be just a little lower or the income a little higher.
Qualifying ratios are just one part of a complex underwriting process but they are often the most misunderstood reason people are not approved for the home mortgage on the first go around.
Another way to look at this and see if you’ll qualify based on your income alone is to take your monthly income of $4000 a month and multiply that times 43%. $4000 * .43 = $1720. Now you know that if your total proposed mortgage payment (PITI) plus all consumer loan payments are below $1720 you’ll qualify.
The next step is to figure out how much of a loan amount you can qualify for based on the maximum house payment. You do this by subtracting your consumer payments from the $1720. Whatever is left over is your maximum home loan payment PITI. You can figure the rest out by calling an originator or by using an online mortgage calculator. If there is not other debt congratulations! You could qualify for a $1720 mortgage payment. If you have $1000 in other payments then you’ll qualify for a $720 mortgage payment. Don’t forget about those real estate taxes and property insurance. And PMI if putting less than 20% down.
Do you see how this part of the process works now? If not please ask questions in the comments section.
