Mortgage & Debt Obligations

House or apartment rental is an option to avoid mortgage obligations.

House or apartment rental is an option to avoid mortgage obligations.

When you look for a mortgage to buy a home, your lender's key concern is finding out how much debt you can take on given your existing debt obligations. People who take on a large home loan or who have high car payments, personal loans and credit card payments soon find keeping up with bills a challenge. Lenders use a few common factors to assess your loan qualifications, including some standard debt ratios.

Mortgage Criteria

Conventional mortgage lenders use a few basic criteria when evaluating your mortgage loan application. Most of the standards used are directed by Fannie Mae, the largest buyer of mortgages in the secondary market. Lenders that want the ability to resell your loan try to stick to their guidelines. As of April 2008, Fannie Mae established a minimum credit score of 580. Fannie Mae typically only buys loans where the buyer makes a 20 percent down payment, which is why conventional lenders normally require this. You must also show five years of good credit after a foreclosure and meet guidelines on loan-to-value limits and debt-to-income maximums. All of these criteria protect you as the borrower from getting too consumed with debt, which also protects lenders.

Mortgage-to-Income Ratio

The mortgage-to-income ratio is one of two common ratios used to evaluate your ability to keep up with debt obligations. On a conventional loan, the typical maximum ratio is 28 percent. To figure out the maximum monthly payment for a conventional loan, you multiply your gross monthly income by .28 or 28 percent. With a monthly income of $5,000, for instance, your mortgage payment can go up to $1,400. This limit is a guideline. If you have unusual income or expenses, the lender may flex the guideline or you may decide to stay below it.

Debt-to-Income Ratio

The debt-to-income ratio is the other common ratio used by lenders. It takes into account the other types of loans you have, such as car, boat, personal or equity loans and credit cards. The standard debt-to-income limit on a conventional loan is 36 percent. Multiply your gross monthly income by .36 to figure out your maximum total monthly debt obligations. In the previous example of a $5,000 monthly income, your maximum monthly debt obligation is $1,800 -- which is a total, including your mortgage. Again, this a guideline, which may be flexible depending on your credit history and other financial information supplied to the lender.

FHA Loans

FHA loans are a popular government-backed loan program from the Federal Housing Authority, part of the US Housing and Urban Development agency. These loans have less stringent credit requirements and a minimum down payment of just 3.5 percent of the loan's value. The borrower does have to pay monthly mortgage insurance premiums to protect the lender because of increased risks of default. The standard maximum mortgage-to-income ratio for an FHA mortgage is 31 percent. The debt-to-income cap is 41 percent with an FHA loan.


About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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