Confused About Mortgage Approvals and what lenders require?

So you've decided to start planning to buy your first home but you have no clue as to what a lender will be looking at to decide whether or not to lend you money to buy a home. This is most certainly a common question with an answer that isn't so simple. However, to give you an idea here is what most lenders examine when processing a pre-approval for credit worthiness:

• Credit Scores
• Length of time on Job
• Debt Ratio
• Household income

These are the primary items examined but far from the only items examined. Further, each lending institution has varying additional items they consider. Of the things I have found that most buyers frequently don't understand is the meaning and calculation of what is know as Debt - Ratio. 

Basically, Debt Ratios are the relationship between ones income and ones expenses. Ratios are generally expressed as two numbers like 29 over 41 or 29/41. This is an example of FHA acceptable ratios. The first number, the 29, represent the relationship between the borrowers income and his new housing expense of principal, interest, taxes, insurance and homeowner dues. A borrower who makes $3,000 per month and has a housing expense of $870 would have a 29% top end ratio. The other number of 41% represents the total monthly debt, including the housing expense and all other debt such as credit cards, loans, child support, etc. Thus in the example of the borrower that makes $3,000 per month and had a total expense of $1,230, would have a 41% bottom ratio.

So when you meet with a mortgage lender and they mention thier debt / ratio expectations you will have an idea of what they are speaking about. Let's take it a little further!! Why not calculate your debt / ratio yourself so that you personally can more accurately estimate when you have reached the expected range for your debt/ratio. 

With most lenders thier guideline is that your total payment, including principal, interest, and escrow payments, should not be more than 28% of your gross (pre-tax) monthly salary. To calculate this for yourself, take your annual salary and multiply it by .28, then divide it by 12. This number is your maximum total mortgage payment per month. Banks also check how much of your gross income is required to pay all of your debts combined. This is called your back-end ratio and includes the mortgage as well as car payments, credit card payments, student loans, and child support and alimony payments. Their guideline for this ratio is that your total debt payments should not be more than 36% of your gross income. To calculate this for yourself, take your annual salary and multiply it by .36, then divide it by 12. This is the maximum allowable amount of your total monthly debt payments.

Go ahead try it out! Are you supprised at what your maximum mortgage note can be from the standpoint of your average lender's guidelines?? Now you have one of the key items examined by lenders understood so work at getting in the right "debt/ratio" range to be more appealing to potential lenders to extend credit to you!! Hopefully this information is helpful in your endeavors.