Mortgage-Refinance Loan Measurement 101 -- Evaluate Your Own Ability to PayWe live in a society where people are losing their homes at an alarmingly high rate. There are several reasons for this, but one could certainly be avoided -- buying a house that creates a loan that is too large for you to handle. This article will examine how to decide your loan size -- whether you are purchasing or refinancing. We'll look at this issue from the point of view of lenders and from the standpoint of what is actually best for you. In a conventional, conforming loan -- one in which you have good credit and good job history -- a lender will look at what he calls "debt-to-income ratio." Many mortgage brokers refer to it as DR (debt ratio). They also break it into two categories -- front end ratio and back end ratio. A front end debt ratio calculates your gross monthly income against your new house payment. Conventional lenders want this number to be at 28 percent or less. So, if you make $3,500 each month in gross income (before taxes and other withdrawals), just take this number and divide by 28 percent. This new number is $980.00, which is the number the lender will use as your front end ratio. So in the lender's mind, you can afford a house payment of $980.00 or less. Remember, though, this is only half of the equation. Now, the lender will look at your overall debt scenario. When calculating your back end debt ratio, the lender takes your new mortgage and all other monthly credit debts -- car payments, credit card payments, other loans, cell phones, etc. Items like insurance and utilities are not included. Conventional, conforming lenders want this ratio to be at 36 percent or less. So, to calculate your back end or overall debt-to-income ratio, take your gross monthly income and divide by 36 percent. Again, let's assume you make $3,500 monthly. When divided by 36 percent, you get $1,225.00. Now, add up all your monthly minimum payments, plus your new house payment, and this new number needs to be less than $1,225.00. So, if you have very little debt, you can afford to go all the way to the $980.00 for a new mortgage. If you have a couple of cars, several credit cards and a cell phone, you'll likely have to get much less house. Now, these ratios are very conservative. In most cases, lenders will allow you to break one or both of these guidelines, based on other factors -- things like A+ credit, good liquid assets or a large down payment. Or, you may need a loan program that is non-conforming. This would involve a lender who increases these ratios as high as 50 percent, meaning your debt can be half of your gross monthly income. Lenders, you see, want to make loans. That's why they are so rich, because they are doing trillions of dollars in loans each year, and getting back even more in interest payments. In order to assure yourself of getting a loan that you can afford, you should qualify yourself. It's important to remember that when calculating debt to income ratios, lenders don't take many important factors into account. For example, they allow you to use gross income -- instead of net income. We pay our bills with our net, not our gross. When deciding what you can qualify for, consider your net income. In other words, add up all your debts and look at the money you have after taxes, retirement, savings, other investments, etc. Also, account for debts lenders do not, such as insurance, groceries, utilities, the probability that taxes on your home will go up, clothing, and spending money for fun and hobbies. After all, you want having a home to add to your life -- not make it more difficult. Lenders leave this part out. Mark Barnes is the author of the new novel, The League, the first work of fiction, based on fantasy football. He is also an investment real estate and home loan finance expert. Learn more about his suspense thriller at http://www.sportsnovels.com. Get his free mortgage finance course at http://www.winningthemortgagegame.com
MORE RESOURCES updated Fri. April / 19 / 2024 Mortgage Interest Rates Today, April 19, 2024 | High Rates Make for a Challenging Homebuying Season Business Insider Bank of Montreal Provides $117M to Chetrits to Refinance Harlem Tower Commercial Observer Average Mortgage Interest Rates: Mortgage Rates by Credit Score, Year, and Loan Type Business Insider How To Get A Home Equity Loan With Bad Credit Bankrate.com 15-Year Mortgage Refinance Rates: Compare Current Rates Business Insider How to Refinance Your Mortgage NerdWallet 30-Year Mortgage Refinance Rates Business Insider Loan Modification Vs. Refinance Bankrate.com With property values strong in 2023, many homeowners tapped home equity lines of credit, pushing total HELOC ... Miami Herald Types of Mortgage Refinance Options Bankrate.com How To Get The Best Refinance Rate Bankrate.com Mortgage Interest Rates Today, April 16, 2024 | Rates Remain Elevated After Last Week's Spike Business Insider The best mortgage lenders for refinancing in April 2024 CNN Underscored Mortgage Interest Rates Today, April 15, 2024 | Rates Are High, But They Still Could Drop This Year Business Insider Best Mortgage Refinance Lenders of April 2024 Business Insider 280 Park Ave.'s owners refinance mortgage and pay down debt Crain's New York Business Bain Proposes Japan's Kioxia IPO to Clear $5.8 Billion Loan Refinance U.S. News & World Report How To Refinance A Rental House Bankrate.com Current mortgage refinance rates CNN Underscored Best Mortgage Refinance Lenders In 2024 Bankrate.com MBA: Mortgage Applications Increased in Weekly Survey Calculated Risk Mortgage Refinance Rates: Compare Current Rates Business Insider Mortgage Rates Chart | Historical and Current Rate Trends The Mortgage Reports When to Consider Refinancing Your Mortgage Business Insider Mortgage Rate Forecast April 2024 Bankrate.com 30-year refinance rates: What to know CNN Underscored Refinance Requirements: What You Need to Refinance Your Home in 2024 The Mortgage Reports Cash-Out Refinancing: How It Works, When To Do It Bankrate.com Current 15-year refinance rates — and lenders that offer them CNN Underscored Mortgage Rate History: 1970s to 2024 Bankrate.com Mortgage Interest Rates Today, April 14, 2024 | Will Rates Still Go Down This Year? Business Insider How To Refinance An Underwater Mortgage Bankrate.com How Soon Can You Refinance a Mortgage? NerdWallet Should You Refinance Your Mortgage In 2024? Bankrate.com Conventional Refinance Rates and Guidelines for 2024 The Mortgage Reports Refinancing a Home Equity Loan (2024 Guide) MarketWatch Will Mortgage Rates Go Down in 2024? What Homebuyers Should Expect Business Insider When to Refinance Mortgage: Is it Time? - Buy Side from WSJ The Wall Street Journal Best Refinance Lenders of April 2024: Refinance Your Mortgage The Motley Fool Pros and Cons of a Cash-Out Refinance Bankrate.com Should I Refinance My Mortgage Now? When to Refinance As Rates Drop Business Insider What Credit Score Do I Need To Refinance? Bankrate.com Office of Research blog: A look at cash-out refinance mortgages and their borrowers between 2013 to 2023 Consumer Financial Protection Bureau
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