display strong ratios
maintain the 28% and 36% rule
Your capacity to repay the mortgage loan is an important factor for lending institutions to qualify you for a loan. Lenders use two ratios to determine loan repayment capacity:
- Housing Ratio:
your total housing payment - including the monthly loan payment, insurance, taxes and other community assessments - do not exceed 28% of your gross monthly income - Debt Ratio:
your total debts - including your housing debt, auto debt, student loan debt, credit card debt and other consumer debt - do not exceed 36% of your gross monthly iincome
If either of these capacity ratios are too high, you will need to change one of the following parameters in order to qualify:
- reduce your borrowed amount
- increase your amount of down payment
- qualify for a mortgage loan that has a lower rate
- apply for federal assistance sponsored loans
- increase your income
- pay off outstanding debts
Calculating Your Capacity Ratio
1: The "housing ratio":
calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.
What are your monthly housing expenses:
- current mortgage loan payment on your home including interest and principal
- real estate taxes
- hazardous insurance
- private Mortgage Insurance, if any
- other mortgage related insurance
- homeowner's association dues
- ground keeping fees
- property leases
- other special assessments and financing
Monthly Income includes the following:
- gross employment income
- overtime bonuses and commissions
- net self-employment income
- alimony, child support and income from public assistance
- social security, retirement, and VA benefits
- workman's compensation or permanent disability payments
- interest and dividend income
- income from trust, partnerships, etc.
- net rental income
