Mortgage ratios are a very important part of the approval process. However, most people make mistakes in calculating them. There is a difference between the ratio you use to get approved and your own budget.

Back in the old days, there were ratio limits you could not exceed. If you went past them, your mortgage was denied. But now with automated underwriting, mortgage ratios are just a part of the whole approval picture.

Mortgage Ratios Calculation

When you figure out how much you can afford each month, you use your take home pay. After taking out your housing expense, you calculated how much you have leftover for all other bills.

For a mortgage approval, they should call it your mortgage gross income ratio because that is the number they use. Underwriting uses your gross income for calculating ratios. Here is how you would calculate your mortgage ratio for underwriting.

Take your total mortgage payment including taxes and insurance along with your credit card debt payments and any child support or maintenance. Divide that number by your gross income and that is your mortgage debt to income ratio. ($3000 debt divided by $6600 gross income equals 45%)

Utilities and things like cable or cell phones are not included in mortgage ratios. It is basically anything on your credit report and child support or maintenance. If there are student loans on your credit report but they are not reporting a payment because they are deferred, take 5% and multiply that by the balance and that will give you a payment to use for your calculation.

There is no hard and fast rule like there used to be on mortgage ratios. Although it used to be for many programs 45% was the max ratio. Any past that and you were denied. Now, they are used as a part of your total picture not as just a way to deny you.

There are some instances when it helps to go higher on your ratios. Let’s say you are employed and your significant other is self employed and you have excellent credit with a good equity position. You can’t use their income to qualify but they do contribute income every month and have for years. Using your income only will make your mortgage ratios high but you know with both your incomes, you can and will pay the mortgage payment.

The automated underwriting computer will take in to account your total picture and maybe let you slide a little on a higher than normal ratio.

FHA mortgage ratios are weighed differently than ratios for a Fannie Mae mortgage by their different underwriting guidelines but again it just depends on how the automated underwriting looks at your whole picture.

However, there is a difference between what you can get approved for and what you can actually afford. Just because you can go higher doesn’t mean you should. It is easy to get caught up in all the excitement when you are out looking for a house. Before you know it, you are looking at homes way out of your price range all because the computer says you can afford them.

It even happens on a refinance mortgage. You may decide to take more cash out than you can afford to pay back or you take cash out to pay off credit cards but you charge them back up again. Now, you have this monster payment and not enough money to go around each month.

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