Am I Ready to Buy My First Home
Do You Have Debt?
By now you may have realized that pleasing banks and lenders is really important when purchasing a home. It pays to know what's on your credit report because you better believe lenders use every bit of it when making their decisions on who to give mortgages to.
Your FICO score isn't the only thing from your credit report that's important lenders. They like to know how much of your hard earned income is going towards debt payments every month. Let's say you make $8,000 a month in gross income. Let's also say you have a $500/month car payment, a $700/month student loan payment, and $1000/month towards various credit and department store cards. That equals $2200 in total debt payments every month, remember this cause we'll come back to it in a minute.
Here's where things get interesting. Lenders look at your projected monthly housing payments: Principal+Interest+Taxes+Insurance (aka PITI) and balance that against your income as well. This ratio is called the front-end ratio and for FHA loans these days it can't equal more than 29% of your gross income. This means with $8000/month coming in, the max PITI housing payment you could afford is $2320 every month.
Lenders will then add the rest of your debt (remember the $2200 from before) to your PITI so your total debt payments are all together. In our scenario the total comes to $4520/month or 56.5% of your income. Ouch. For FHA loans the maximum qualifying ratio is 41%. Looks like we'll have to pay down some credit cards, or sell the car, or make a lot more money if we want to buy a home right now. Whether or not you want to is something we'll explore next time on...
Am I Ready to Buy My First Home.