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All that mortgage lenders can do is tell you there own criteria for approving and denying mortgage applications and calculating the maximum that you are able to borrow. For a property that you are considering to buy, the lender calculates the housing expenses and normally requires that it does not exceed 40 percent of your monthly before tax (gross) income. If you are self employed and complete a 1040 form, schedule C, mortgage lenders use your after expenses (net) income, from the bottom of schedule C.
Take into consideration that this housing expense ratio completely ignores almost all your other financial goals, needs and obligations as well as property maintenance and remodeling expenses which can consume a lot of a homeowner’s cash.
In addition to your income, a lender also considers all of your debts. Specifically, a lender also considers all your monthly payments for other debts you may have. These debts may be student loans, auto loans and credit card bills. In addition to the percentage of your income that lenders allow for expenses, they typically allow an additional 5 percent to go toward other debt repayments.
As you now see, lenders’ are mainly concerned about your ability to repay your mortgage loan. They want to be sure their investment is secure. Now that you have a basic understanding as to how lenders’ ratios work we can explore how to calculate your mortgage payment amount. Check out my next blog where you will learn exactly how to calculate your monthly payment.
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