Debt and Income Ratios Explained
Lenders basically measure you at a basic level with two factors:
-your income
-your debt load
Your income can be analyzed by looking at your past two years' income. This is so the lender can see how stable your income has been.
A sudden increase in your compensation last month may give you a higher current income, but the lender may discount this a little. Also, if you are on commission the lender will need to see how your commission income has been over time.
Your debt load is a projection of your current debt plus the future mortgage expense. This debt load includes recurring monthly debt expenses - credit card debt, car payments, mandatory child support, etc. The lender may not include some of your monthly debt if it is about to be paid off. For example, a lender may regard ignore your current car payment if you will pay it off completely in two months.
The debt load the lender factors in can also exclude debt that will be paid off in a refinance. For example, if your refinance will pay of $30,000 in credit card debt and $10,000 in a car loan, then those monthly payments will not be factored in because they will be paid off as part of the refinance. Keep in mind that many times the checks to your creditors to pay off your debt are created as part of the transaction and you may have no choice but to pay some debt off. If you co-signed on someone else's loan and the lender wants to pay it off, you may want to go to another lender.
Debt to income ratios are a measure of the ratio of your monthly debt payments to your monthly pretax income. If your total monthly payments are $3,000 per month and your pretax income is $10,000 then your debt to income ratio is 30%.
Many lenders use a combination of two measures of your debt - with and without the mortgage. There is a maximum level of overall debt, and a subset of this is the maximum level of mortgage debt.
Debt and Income Ratios - How To Work This
Different lenders have different guidelines. Some will allow a debt to income ratio of 55%. Some will only allow a debt to income ratio of 38%. Each lender is different.
If you want a larger loan than one lender is willing to provide, use another lender that allows for a higher debt to income ratio.
Keep in mind that many loans are "stated loans" where you only have to state your income, not prove it. Your "stated income" should mesh with your job title. If you are a gardener claiming a $25,000 per month in income, the lender may not believe this. What one lender will allow you to state as your income is very different than what another lender will allow. Just because one lender rejects your application based on your stated income does not mean another lender will.
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