A lender uses two basic ratios when looking at an applicant:
current monthly debt load
projected future mortgage debt load
total monthly income
The current monthly debt load is based on the borrower's current monthly payments such as credit cards, student loans, and other consumer lines of credit.
The lender then adds to this debt burden the additional cost of the proposed new mortgage loan. They do this by projecting how much it would cost you to pay for the loan amount and loan rate you are looking for. This can include your monthly mortgage payment, property taxes, hazard insurance, and more.
The lender then compares this to your pretax income. If your monthly debts are $1,000 and your projected housing expenses are another $1,000 per month and your monthly pretax income is $5,000 then the lender sees it will take 40% ($2,000 debt/ $5,000 income) or your pretax income to take care of your monthly debt load. Remember that taxes also take a substantial amount of your net income.
Many lenders have ratio guidelines that don't allow for more than 38%-40% debt to income ratios. Lenders make exceptions to their guidelines on a case by case basis. If an applicant is strong in other areas, such as credit, then the lender may make an exception.
Many lenders offer "stated income loans". These loans do not require a borrower to document their income, but rather only to state them. The stated income should be reasonable to the applicant's line of work or profession.
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