Why You Need To Know What Your Debt Ratio Is If You Plan On Buying A Home

The days of easy qualifying to buy a house are over and even if the banks loosen the guidelines in getting a home loan I doubt they will be like it was in the past.  From 2003 to 2007 it was pretty much all you needed to buy a home was a pulse, the Santa Maria real estate market was booming like every other place in the country .  Really all you needed was a pulse back then to qualify and some ID proving who you were, no lie.  Which is probably why we had so many foreclosures including future wannabe Donald Trumps just buying and flipping left and right until the day the party ended then it all came tumbling down.  Now you still needed to have some form credit just not terribly bad credit.  You were able to get a stated income loan with only 580 fico score.  In today’s world 90% of the banks would give you a turned down without blinking with that score.  Back then you stated your income so you can qualify.  No one verified, so if you said you made $10k then you made $10k.

In the new world of the after math of Great Recession which I think was more like a second Depression.  You really have to prove what you make and your bills do really count against you.  What comes into play is what is the amount of debt you have and will have with your new mortgage payment taking into consideration, your taxes and your insurance not just your mortgage payment.   Most lenders will cap you out at 45% debt ratios.  There may be a few that will go higher but till your loan is approved and you have your keys I would recommend you stick with a 45% debt ratio as a guideline.

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So lets say you make a $2k a month then your mortgage payment including any car payments, child support , or credit cards cannot exceed $900.00, which is 45% of $2k.  Depending where you live it is going to be very difficult to find a home with a mortgage payment and your bills for less than $900.00.  If you had a car payment of $500.00 then your mortgage cannot exceed $400.00 a month.   So knowing what bills you have that may show up on a credit report will give you an idea of what you may be able to qualify with a monthly payment.

The other 65% is used to survive.  You will still have to buy food , go out and have a life not to mention utilities etc.  Now when trying to figure out your income use the gross if you are a w2 employee. So that is before taxes now if you are self employed you will have to use what you actually reported on your tax return.  Does not matter what your company made its what you reported to the govt.  Usually they can add back in depreciation or one time large capital investments.

So keep in mind when buying that car or what ever it may be that you will have to deduct that from what your income in using to qualify for a home loan.  If you have any questions just let me know.  Good Luck

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