When you apply to purchase or refinance a home the mortgage lender takes into consideration all your monthly fixed expenses, adds them into your housing payment and creates what’s called a debt to income ratio. Also called payment to income ratio which is expressed as your total monthly expenses plus your housing payment included divided into your monthly income.
Fannie Mae and Freddie Mac allow up to 50 percent for this number and the FHA will sometimes allow as high as 55 percent in some cases.
When you have a monthly payment on a debt obligation, its takes $2 of income to offset every dollar of debt. For example, if you have a $500-month car payment it’s $1,000 of income needed to offset the debt.
When you have an alimony obligation that debt comes off income and it’s not counted as a monthly debt, this is a good thing because it allows you to borrow more when purchasing or refinancing a house.
Let’s say you have child support due. That is counted as a monthly debt against income from the mortgage payment. Child support works in the opposite fashion. Simply put, a child support when qualifying for a mortgage loan is equivalent to a car payment or a credit card payment.
So, for example in that same situation using $500 a month as the monthly payment then you would need $1,000 a month of income to offset that payment. $500 of debt is equivalent to about $100,000 of spending power approximately.
You heard that above information correct, $500 a month of payment is about $100,000 of spending power that’s the difference between a $400,000 house for example and a $500,000 house. So, at the end of the day your ability to purchase can be altered by child support or by alimony.
Following are ways to boost your borrowing potential:
Paying off debt to qualify if you have the cash
Possibly getting a co-signer
And possibly changing your income
If you’re looking to purchase or refinance a house talk to a quality lender who can help you navigate through what often might be perceived as a complex debt picture.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.