January 12, 2021
Every mortgage or finance blog includes a lot of writing and advice about the need to monitor your credit reports. And make no mistake, this is important advice that is good to follow, but if you are in the market for a new home in 2021 the amount of monthly debt you have compared to your monthly income will be just as important for loan approval.
Why Your Debt Matters
Some applications crunch the numbers and believe they can afford the loan on paper. But what happens when that does not match what the lender gets when she runs your debt ratio numbers? People who technically qualify on paper but not in reality are bad risks for the lender and their jobs depend on screening out those bad risks.
And that means you will want to work on reducing your monthly debt as early as possible in the home loan planning stages.
How can a borrower technically qualify for the loan on paper and not in real life? Much depends on the person filling out that piece of paper. If you don’t include ALL your monthly expenses you may find yourself in a tough spot when it comes time for loan approval.
Did you make a list of all your income and compare it to all of your current, pre-mortgage expenses? If those are the only calculations made you won’t come up with the right numbers and your debt ratio calculations will be artificially skewed in your favor. But how?
Don’t Forget About Your Mortgage Costs
There are expenses your loan officer will include in the debt ratio calculation that aren’t present for the borrower before the loan is approved. And that is why a loan officer generally makes one calculation (mentioned above) including all your pre-mortgage monthly payments but no mortgage costs.
The OTHER calculation will include mortgage expenses you are obligated to pay monthly after the loan has closed.
Borrowers who add their monthly expenses but fail to include property taxes, any homeowner association fees that may be due, plus mortgage insurance and/or homeowner insurance fees, do NOT have the full picture of how much money will be heading out the door after the mortgage payments have started.
When adding your expenses, do not forget about the mortgage payment, insurance, taxes, and fees that may be due each month–if you don’t currently have those expenses you might feel the need to get some help trying to sort out how much they will be.
Your participating FHA lender likely has quite a bit of experience with these debt ratio issues–ask a loan officer how to properly anticipate the mortgage payment and everything that goes into it.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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