Now that you're married and want to buy into that condo building with the swimming pool, you've started looking at your finances to see just how much condo you can afford. You've checked your credit reports for erroneous information and you've adding up your monthly expenses and total debt. Though you don't owe much on credit cards or car loans, there is that huge student loan debt. And yes, it does have an affect when applying for a mortgage.
When you apply for a mortgage it isn't any different than applying for any other loan. The lender takes into account your employment, length of time on the job, income, debt and credit history. What you owe, how much, how long and how regularly you paid it all figures into the calculation of your credit score. Student loans are on your credit report. If you have paid them regularly you will get positive points for that and it should improve your score. The amount of your student debt, and the amount of the monthly payments, will also affect your score.
Lenders have different criteria for their allowable debt ratio. The debt ratio is the percentage of your income that is dedicated to paying off debt. Different lenders have different criteria. Typically, all of your debt combined -- mortgage, property taxes, home owners insurance, credit card and student loan debt and installment loans -- should not exceed 36 percent of your income. If it does, the loan might be denied or, if you get it, you might be charged a higher interest rate.
FHA loans typically have less stringent requirements than private lenders. If you have a lot of student debt, you might want to apply for an FHA loan. The FHA has two main criteria when reviewing your application: your effective income to loan ratio, and your debt to effective income ratio. To calculate the income to loan ratio, add up your monthly mortgage payment -- including interest, principal, hazard, mortgage insurance premiums and condo fees -- and divide that by your monthly income. If the result is below 31 percent, you are on your way to qualifying. Next, take your monthly mortgage payment, including all of the above items, and add that to your monthly recurring debt payments such as student loans, installment loans, credit cards and personal loans. Take that total and divide it by your gross monthly income. If this number is below 43 percent, your debt to income ratio might qualify as well.
If your debt to loan ratio is too high, try to save more for a down payment, which reduces the amount you have to finance. This lowers your monthly payment and favorably changes the ratio. Pay down or pay off your other debt. Lenders take a hard look at your monthly obligations, and anything you can do to lower that amount helps. You could also consider a less expensive property. Also, remember that the lender is looking at your gross income, which is income before taxes. When you decide how much you can afford to pay for your mortgage, make the calculations in Section 3 yourself, only use your after-tax, or net, income. This will show you the true impact the mortgage will have on your cash flow.
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