Do I Qualify For A Mortgage Refinance?
In today's uncertain lending environment, it is often unclear to potential mortgage applicants if they qualify for a refinance. Ever since the recent financial crisis, there has been a great deal of media exposure regarding how banks are not lending. Many people believe that only the very rich or most qualified borrowers are successful when applying for a mortgage. The truth is, the mortgage crisis did more good then harm when it comes to correcting underwriting guidelines that for many years were too lenient and extremely led our country to a disaster real estate bubble. Today, guidelines are more stringent but at the same time they are better in determining if a borrower can comfortably cover their monthly payments.
The first step in determining whether or not an applicant will qualify for a mortgage is to calculate their debt to income ratio. The definition of a "DTI" ratio is the total gross income for the borrower (s) divided by the total monthly obligations. When considering income, borrowers should always take their gross pay, or the amount paid to them prior to any deductions for taxes, IRA, etc. Monthly obligations would typically be any payment that shows up on the borrowers' credit report. These payments are usually credit cards, student loans, car payments, 2nd mortgages, home equity lines of credit, and store charge cards. The total monthly payments for these items are then added to the monthly tax and homeowner's insurance payments and the principal and interest payment of the proposed mortgage. The following is an example of how to calculate a debt to income ratio.
Mr. and Mrs. Jones both make a combined annual salary of $ 96,000. They have minimum monthly payments on credit cards of $ 350, student loan payments of $ 250, two car payment of $ 250 each, annual taxes of $ 5,000 and an annual homeowner's insurance premium of $ 700.
In this example, Mr. and Mrs. Jones would there before have a gross monthly income of $ 8,000 and gross monthly obligations of $ 1,575. If they were applying for a $ 200,000 mortgage at 5%, and a 30 year amortization, the principal and interest payment would be $ 1,073.64. Therefore, total monthly obligations jump to $ 2,648.64 and their debt to income ratio would be 33 percent ($ 2,648.64 total debt / $ 8,000 gross income).
Today, Fannie Mae guidelines dictate that borrowers do not have over a 45 percent DTI ratio. Therefore, in the above example, the borrower would have satisfied this requirement. Of course, there are many guidelines that a borrower must satisfy in order to qualify for a refinance, but calculating one's debt to income ratio should be one of the first. It can be very helpful to determine if it makes sense to move forward with a mortgage application and the probability of a successful loan commitment.