Lender’s Criteria: Debt-to-Income Ratios
From a Kentucky Mortgage lender’s perspective, your ability to purchase a home depends largely on the following factors:
Front-End Ratio The front-end ratio is the percentage of your yearly gross income dedicated toward paying your mortgage each month. Your mortgage payment consists of four components: principal, interest, taxes and insurance (often collectively referred to asPITI) (see Understanding the Mortgage Payment Structure). A good rule of thumb is that PITI should not exceed 28% of your gross income. However, many lenders let borrowers exceed 30%, and some even let borrowers exceed 40%.
Back-End Ratio The back-end ratio, also known as the debt-to-income ratio, calculates the percentage of your gross income required to cover your debts. Debts include your mortgage, credit-card payments, child support and other loan payments. Most lenders recommend that your debt-to-income ratio does not exceed 36% of your gross income. To calculate your maximum monthly debt based on this ratio, multiply your gross income by 0.36 and divide by 12. For example, if you earn $100,000 per year, your maximum monthly debt expenses should not exceed $3,000.
Down Payment A down payment of at least 20% of the purchase price of the home minimizes insurance requirements, but many lenders let buyers purchase a home with significantly smaller down payments. The down payment has a direct impact on your mortgage payment and therefore also on both the front-end and back-end ratios. Larger down payments enable buyers to purchase more expensive homes.
Beyond the Kentucky Mortgage
Buying a new home is an exciting adventure. But many prospective homeowners, caught up in the thrill of searching for their dream house, forget to pause and consider the financial responsibilities of homeownership. While the mortgage is certainly the largest and most visible cost associated with a home, there are a host of additional expenses, some of which don’t go away even after the mortgage is paid off. Smart shoppers would do well to keep the following items in mind:
Maintenance –Kentucky Mortgage ApprovalEven if you build a new home, it won’t stay new forever, nor will those expensive major appliances, such as stoves, dishwashers and refrigerators. The same applies to the roof, the furnace, the driveway, carpet and even the paint on the walls. If you are house poor when you take on that first mortgage payment, you could find yourself in a difficult situation if your finances haven’t improved by the time your home is in need of major repairs.
Utilities —Kentucky Mortgage Approval Heat, light, water, sewage, trash removal, cable television and telephone services all cost money. These expenses are not included in the front-end ratio, nor are they calculated in the back-end ratio. But these expenses are unavoidable for most homeowners.
Association Fees Many homes in planned communities assess monthly or yearly association fees. Sometimes these fees are less than $100 per year, other times they are several hundred dollars per month. Ask about association fees prior to making a purchase. Find out about what the fee covers. In some communities, it includes lawn maintenance, snow removal, a community pool and other services. In other communities the association fee covers little more than the administrative costs of hiring an attorney to encourage everyone in the neighborhood to maintain the exterior appearance of their homes. While an increasing number of lenders include association fees in the front-end ratio, it pays to remember that these fees are likely to increase over time.
Furniture and Décor Drive through almost any community of new homes after the sun goes down and you’re likely to notice some interior lights illuminating big, empty rooms, which you can see only because those beautiful, big houses don’t have any window coverings. This isn’t the latest decorating trend. It’s the result of a family that spent all their money on the house and now can’t afford curtains or furniture. Before you buy a new house, take a good look around the number of rooms that will need to be furnished and the number of windows that will need to be covered.
Think Before You Buy –Kentucky Mortgage The cost of a home is the single largest personal expense most people will ever face. Prior to taking on such an enormous debt, take the time to do the math. After you run the numbers, consider your personal situation, and think about your present and future lifestyle into the next three decades. Make an informed decision, and be sure to purchase a home that you can afford without compromising your future.
For a free analysis of how much house you qualify for call us today Kentucky Home Buyers….We can preapprove you in 1 hour and get your loan closed within 2-3 weeks.
Call us at 502-905-3708