Your housing ratio is a large determining factor on your mortgage application. If it’s too high, you may not get approved for the loan you want. So how do you figure out this ratio and what does it need to be?
Keep reading to learn all about this important factor below.
Your Housing Payment
The first thing you need to determine is the amount of your housing payment. You’ll get this figure from the potential lender. They must provide you with a Loan Estimate within 3 business days of applying for the loan. On this document, you will see your principal and interest payments plus the estimated taxes and insurance. This number is your total housing payment.
If you didn’t apply for a loan yet, you can figure out an estimated housing payment if you know the estimated price of the home you want to buy. You can choose an average interest rate and run a mortgage calculator to determine your estimated payment. You can also find the real estate taxes for the home and estimate the homeowner’s insurance costs.
Your Gross Monthly Income
Your next step is to determine your gross monthly income. This is income before you pay taxes. In other words, it’s not the money you bring home. You can figure out your gross monthly income with the following calculations:
- Annual salary/12 months if you are paid monthly
- Annual salary/52 weeks if you are paid weekly
- Annual salary/26 weeks if you are paid bi-weekly
- Hourly rate x 40 hours x 52 weeks if you are paid hourly
You’ll need this figure to determine your housing ratio, so make sure you get an accurate picture of your gross monthly income.
The Housing Ratio
Once you have these two figures, you can determine your housing ratio:
Total housing payment/Gross monthly income = Housing Ratio
So what should your housing or front-end ratio be? That depends on the mortgage program you choose. As a general rule, you should try to aim for 28%. In other words, your housing payment should not take up more than 28% of your gross monthly income.
But there are some exceptions to the rule. The 28% rule is a conventional loan rule. Not everyone will go the conventional route. The following loan programs have higher front-end ratio maximums:
- FHA loan – 31% front-end ratio maximum
- USDA loan – 29% front-end ratio maximum
What to do If Your Housing Ratio is High
So what happens if you calculate your housing ratio only to find out that it’s higher than you anticipated? You have a few options:
- Find a lower priced house
- Put more money down on the home to bring the payment down
- Figure out a way to increase your income
The best choice is usually to find a lower priced home so that you don’t buy a home you cannot afford. If you have your heart set on a specific home, you may have to get creative and think outside of the box. Finding ways to manage your income or make a larger down payment can help you lower your housing ratio and get the loan you need.