Understanding Your Expense Ratio
When you are working with a mortgage lender to secure a mortgage, there are many variables that they are going to consider before approving you. They will look at your credit score, your salary, your employment history and your current debt. They will also look at something called your “expense ratio.”
Your expense ratio shows lenders how much stress the mortgage would place on your income. It takes into consideration your income and the expenses that come with owning a home. This number alone could be enough for a lender to deny your mortgage application.
Generally, the lender will allow you to borrow up to 2 or 3 times the amount of your annual income.However, they also have to account for your current debt, bills, and expenses.
The Calculation
To determine your expense ratio, the lender is going to use both your debt-to-income ratio and your housing expense ratio. These two numbers give lenders a good idea if you can afford the monthly mortgage payment.
What is the Housing Expense Ratio
The housing expense ratio takes into consideration all of the expenses that come along with owning a home. This includes things like property taxes, homeowners insurance, HOA fees, mortgage interest, mortgage principal, and private mortgage insurance.
Lenders are looking to see that this number is staying below 28% of your income every month. Once your ratio goes higher, lenders think it gets a little too risky.
To calculate your ratio, simply add up all of your monthly payments related to your house. That includes HOA fees, insurances, taxes, and your mortgage payment. Then you take this total and divide it by your total monthly income. This will tell you your ratio.
Debt-to-Income Ratio
Your debt-to-income ratio takes into consideration all of your debt. Lenders like to see this number stay at or below 36%. However, the lower it is, the better. Your debt will include your mortgage payment, car loans, student loans, and credit card loans.
To calculate your ratio, divide this amount by your monthly income and multiply it by 100. This will give you the percentage of your debt-to-income ratio. If your ratio is on the high side, start working to lower it.
Pay down on credit cards and any other debt that you have. When you reduce your total amount of debt, you will have a better ratio and a better chance of getting approved.
When you are ready to purchase a Richmond house, you want to put yourself in the best scenario possible. Understanding what lenders are looking for will help you to prepare to give yourself the best chance possible of being approved. Work on paying down your debt to make room for the expenses that are going to come with becoming a Richmond homeowner.
If you have any questions about the process, contact your mortgage lender before you start the process of buying a Richmond house. The sooner you start, the bigger difference you will be able to make to help your chances of getting approved and being able to afford the house of your dreams.