How Your Mortgage Is Affected By Debt Ratios

Debt Ratio Basics

Mortgage lenders will evaluate your loan application in the same way that it evaluates other applicants. Total debts are measured as a monthly amount, including monthly credit card payments, car payments, student loans, department store cards and other amounts. This information is all readily available on your credit report, so it isn’t a good idea to hide your debts from your mortgage lender. They will see it on your credit report, and you may lose your chance at a loan as a result. The total amount of monthly debt is compared to total monthly pre-taxed income. Total debt also includes proposed mortgage payments. Your lender will figure out what your monthly payment will be based on the loan level and interest rate that you qualify for.

Income

Pre-taxed income includes base salary, commissions, bonuses, rental income, interest income and any other possible source of income. The lender compares these numbers to generate a debt to income ratio.

Lender Approval

Mortgage lenders have guidelines for different loan programs. Some are harder to get and have a lower debt to income ratio than others. Others, like a five year fixed loan may require a debt to income ratio of below 40%, while another may require a debt to income ratio below 36%.

Loan Amount

A lender will occasionally use this debt to income ratio to help determine how much of a loan can be approved for you. If your mortgage payment is too large of an increase in debt load, the lender may have to approve you for a smaller loan.

Different Lenders

Different lenders have different rules. Some will not lend to a borrower with a debt to income ratio above 42%, while others will tolerate up to 55%.