How do the 4 factors above affect you in buying a house?

See the examples below to further understand how these factors may work for or against you.

Examples:

Suppose you wish to buy a house that costs 175,000. You and your wife/husband make about $60,000 per year total. (this is your gross income before taxes, insurance, and retirement deductions). You have a car payment of $300 per month and two credit cards that each have a minimum payment of $75. Your total non- housing expenses therefor are $450 per month ($300 + $75 + $75). Your income is $5000 per month ($60,000/12mos.) Assuming the property taxes on the house you want to buy are $2400 per year ($200 per mo.) and the homeowners insurance is $600 per year ($50 per month) Your mortgage payment at 100% financing would be roughly $1514.63 per month (This figure includes the Principle and Interest on your mortgage plus Taxes and Insurance).  This number is also referred to as the PITI (Principle, Interest Taxes and Insurance)

            Your debt ratio is calculated by adding your mortgage payment (PITI) to your monthly debt payments ($1514.63 + $450= 1964.63) and dividing that by your income ($5000.00)

$1964.63 / $5000.00 =  39%   
Debt Ratio (Debt To Income Ratio sometimes referred to as DTI)

In other words 39% of your income is required to pay all of your debt. Notice that other bills such as car insurance, groceries, heating oil, electric and phone are not factored into this formula. It is assumed that you will be able to pay these other bills with your remaining (or disposable) income. Most programs do not factor in these other bills when calculating your debt ratio.

A 39% debt ratio is considered pretty good. Assuming your credit was fair (620-640) and your assets were enough to cover the closing costs and escrows $5000-$6000. You would probably qualify for several very good programs including State housing loans and other FannieMae/FreddieMac 100% programs.

Example:

Now let’s assume your income is only 50,000 per year ($4165/mo). Suddenly your debt ratio in this scenario increases to 47%. You may have qualified at 39% DTI but at 47% you may not. However if your credit score was higher say 680-700 or you had an extra $10,000 in a 401k or IRA then you might still qualify. Strength in one area can compensate for weakness in another. To fully understand see the last example below.

Example:

Two families are trying to buy identical houses in the same neighborhood. They are both priced the same as the house in the examples above with the same taxes and insurance costs.

Family no 1 has an income of only $42000 per year (3500 per month) They have only $2000 in the bank but they have $15000 in an IRA. They have 720 – 740 credit scores. Even though they have high credit scores and have been diligent about saving for the future they have a debt ratio of 56% (very high) and they do not have enough liquid money to cover the closing costs without cashing in the IRA which they do not want to do.

Family no 2 has much more income $70,000 per year ($5833/mo) their debt ratio is only 34%, but their credit scores are low (580-600) do to some late payments on the credit cards. And they have no IRA and only just enough money to cover the closing costs.

So which family gets approved and which family does not?

The answer is that they both may get approved.

Family #1 has demonstrated good credit history and has $15,000 in an IRA. Even though they will not have to use the IRA the bank still considers it important because in an emergency they could tap into it to pay their bills. By utilizing a state grant the customer was able to get enough money to pay the closing costs and reduce the amount borrowed to 97% of the purchase price. (this website can also tell you if you qualify for state grants).

Family #2 may qualify despite their low credit scores and lack of reserves (fall back money) because they have a very low debt ratio. In this case a Fannie Mae or Freddie Mac first time home buyers program may work well for them.

The examples above are hypothetical and deal with only one or two types of programs and are examples of 100% or near 100% financing scenarios. There are thousands of other programs available and because every house buyer is different the scenarios above may not fit your situation. You may have better DTI but worse credit or Visa-versa. You may have more money in the bank and are able to put 3-5 or even as much as 20% down. Many programs will allow you to put money down on a house that is a gift from a relative. Sometimes you can buy a family members house by utilizing a “Gift of Equity”.

We website can help you figure out what is right for you before you go to look at a house. We also tell you what to expect for a mortgage payment... and pre-qualify you for FREE!