Perhaps the single biggest factor in qualify for a mortgage is your debt ratio. The problem with this is, it’s often not explained very well to those applying. Most people are led to believe it translates into “You don’t make enough money” or “You have too much debt”. The even greater challenge is, when renting, your debt ratio is never considered. So, in this blog, we will show you what goes into your debt ratio, and a simple way to calculate it so that you can be better prepared for home ownership.
Let’s start with what the debt ratio is. Lender allow you to carry a maximum total debt service ratio of 44%. So, what monthly debts count towards this ratio? Your mortgage, property taxes, condo fees, car payment, credit card payments, loan payments, line of credit payments, and cell phone payments. So let’s show you an example, using a two person income of minimum wage, working 40 hours a week each.
1) Combined Annual Income = $58,240
2) Multiple that by 44% = $25,625
3) Divide that by 12 (months) = $2,135
4) Subtract Monthly
Loan Payments – $0
Credit Card Payments – $200
Line of Credit Payments – $0
Cell Phone Payment – $85
So, in this example, the people could afford a monthly mortgage payment of $1150/month.
Regardless of how high or low, this number ends up being for you, you’ve taken a huge step toward your goal of homeownership, just by being more aware!
How is this relevant to someone who is renting? Well by going through the same exercise, you can see if your current rent is more or less than what you would get approved for mortgage-wise, and you can start making the appropriate adjustments (earning more, reducing debt, etc.)
This exercise will also help because, in our next blog, Sandy will shed some light on how to reduce those debt payments or increase what you can afford, simply by being aware of where your money goes.
Congrats! You’re now one step closer. Own the process. Own the house. Own It Guelph!