Have you ever felt upset with your loan officer because you dont qualify for your desired mortgage program? Were you feeling like strangling him or her (lol) Well, its understandable; we humans like things to go our way, but I write this post to help you understand the variables that determine whether you qualify for any given home loan program.

Each mortgage program has established level requirements for the housing and debt ratios, and your loan officer will use your gross annual income, monthly debt payments, housing expenses, and property value to determine whether you meet these.

So here I break down the housing and debt ratios for you:

HOUSING RATIO:

The housing ratio looks to the estimated housing expenses and to your gross income.

To calculate an estimate of your housing ratio, also known as the front-end ratio:

First, we need to determine gross monthly income, GMI.

GMI = (gross annual salary - i.e. including tax deductions) / 12

Second, we add these estimated figures to calculate estimated monthly payment:

• monthly mortgage payment (i.e. principal and interest)
• 1/ 12 or monthly equivalent of the real estate tax
• 1/12 or monthly equivalent of the homeowners insurance
• home association fees, if any

Then we divide the estimated monthly payment amount by your gross monthly income:

housing ratio = estimated monthly payment / GMI

This percentage will let us know the program loans you qualify for. For example, you are limited to a maximum of 28% for most conforming loans, 29% for most FHA loans, and 33% for most jumbo loans.

Notice how this number decreases as your gross monthly income gets bigger relative to the estimated monthly payment. This results in an increased residual income. If you have high residual income, your lender may consider making exceptions to the maximum ratios limitations. As a sidenote, keep in mind that real estate taxes and homeowners insurance will vary depending on where you buy your property.

DEBT RATIO:

The debt ratio looks to your current level of debt.

To calculate an estimate of debt ratio:

First we add all monthly debt payments to calculate your total monthly debt payments:

• credit cards
• student loans
• car loans
• any legal financial responsibilities (i.e. child support, alimony, etc.)
• any other mortgage payments

Second, we add the total monthly debt payment figure to the estimated monthly payment we calculate in the housing ratio step, and divide these by your GMI:

debt ratio = ( total debt payments + estimated monthly mortgage payment ) / GMI

This percentage will dictate which programs you qualify for. For example you are limited to a 36% debt ratio for conforming loans, 41% for FHA loans, and 40% for jumbo loans.

These housing and debt ratios will be considered by the lender to qualify you for a loan. These are some examples of commonly accepted ratios:

• 28/36 for conforming loans
• 29/41 for VA loans
• 33/40 for jumbo loans

If you are unable to estimate your monthly mortgage payment, you can use your gross monthly income, GMI, and the maximum housing and debt ratios of your preferred loan program, to calculate the maximum allowable payment a lender would approve:

Maximum allowable mortgage payment = gross monthly income * .28 (for conforming loans)

Maximum allowable mortgage payment with debts = (gross monthly income + total monthly debt payments) * .28 (for conforming loans)

Boring? Great! I suggest you call your loan officer and ask him to do the dirty work (lol). Although your loan officer has no decision power about your qualification, he/she may be able to find a combination of programs to help you finance your purchase. Remember, all boils down to your annual gross income, total monthly debt payments and credit score. So next time, don't get upset with your expert; instead, get inquisitive and work with him/her to figure out programs you qualify for. For those of you who want to learn more about the mortgage application process, you can visit Freddie Macs homeownership resources page to access more tools: http://www.freddiemac.com/homeownership/calculators

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