Know Your Expense to Income Ratio Before Applying For a Home Loan

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The expense-to-income ratio is a financial statistic that compares the cost of living expenses to your monthly income. It’s a valuable metric for determining your capability to maintain mortgage payments.

Can You Afford a Good Home?

As you search for your dream home, one of the most important numbers to keep in mind won’t appear on a real estate listing or your paycheck – it’s your expense to income ratio, and it could make or break your ability to get a mortgage loan.

What is The Expense-to-Income Ratio?

The expense to income ratio is the monthly mortgage, tax, and insurance payments divided by your monthly pre-tax income. Mortgage lenders frequently use this ratio to assess a potential buyer’s creditworthiness or financial risk.

Mortgage lenders are looking for an expense to income ratio that is 28 percent or less. This is considered “safe” by the Federal Reserve. To calculate yours, add up the prospective mortgage payment, insurance payment and property tax bill for each month, making sure to include interest, and divide that total by your monthly pre-tax income.

Expense-to-Income Ratio Example

If the lender determines your monthly mortgage payment will be about $1,200, plus $125 in property taxes and $60 in insurance, your total monthly housing costs are $1,385. If your monthly pre-tax income is $5,500, your ratio is about 25 percent – in the safe zone.

How Much House Can You Afford based on this Ratio?

Might you be able to afford spending a higher percentage of your income on housing costs? Sure. No one understands your financial picture better than you do. However, lenders have to be concerned about their own bottom line, and most won’t consider financing buyers who are planning to exceed that 28th percentile.

Understanding your ratio will help you restrict your property alternatives and boost your mortgage application.

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