|
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).
Return to
Real Estate 101 Page
|
