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Home Buying Tools
Financial Ratios
Lenders calculate ratios as an important criteria in determining your
credit worthiness. Before credit scoring models were developed,
financial ratios were the leading criteria for approving a mortgage
application. The following is a simple example of ratio calculations:
Monthly Housing Ratio =
(Mortgage + Property Taxes + Property Insurance) / Monthly
Income
($895 + $210 + $75) / $4,700 = 0.25
Note: For a Condominium, add Condo Fee(s) to Monthly Payments
Monthly Debt Payments Ratio =
(Housing Payments Above + Auto Loan + Credit Cards + Alimony + All Other
Debt) / Monthly Income
($895 + $210 + $75 + $325 + $250 + $0 + $0) / $4,700 = 0.37
Conservative lenders may have fixed ratio criteria such as "28, 36"
for a mortgage to be approved. That is, 0.28 or less on the Housing
Ratio and 0.36 or less on the Debt Payments Ratio. In the above
situation, a rigid lender may not approve a mortgage (or may require the
person applying to pay off a credit card before the mortgage is approved).
In general, a high credit score may greatly influence a lenders approval
decision and "30, 40" may be acceptable for instance.
To lower your Housing Ratio favorably, one has to buy a house of lesser
value or be approved for a super low interest rate. To lower your Debt
Payments Ratio favorably, one has to pay off some debt. It's a good
idea to know your own ratios before applying for a mortgage (examples are
listed on the Buyer Tools page under
Pre-Mortgage Documents). |
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Return to Real Estate
101 Page |
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