Mortgage eligibility is based on several factors. However, the most important factor is the qualification ratios (a.k.a., debt-to-income ratios). Qualification ratios are used to determine your ability to repay a mortgage loan. Ratios are separated into two defined types called the "housing ratio" and "debt ratio." The industry standard allowed percentages are 28 per cent for housing (top ratio) and 36 per cent for the debt (bottom ratio). These ratios are determined based on your income and debts. Maximum ratio limits are set by the lender and can vary depending on other factors.
Combined monthly income--£4,452
Housing payment (PITI)--$1,975
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Figure out the total monthly gross income for all borrowers responsible for the loan. This is the income before taxes have been deducted.
Estimate the new housing payment which includes the combined principal, interest, taxes and insurance (known as PITI).
Ask your bank or representative for their maximum allowed loan ratios. Use 28 per cent to calculate an estimate housing ratio until you receive the exact allowed percentage.
Calculate the top (housing) ratio by dividing the new housing payment (PITI) and your gross monthly income. This amount should not exceed the actual top ratio allowed by the lender.
$1,975 / £4,452 = 0.28 per cent top ratio
Figure out the total of your other monthly debts. These debts include payments recurring monthly such as utilities, car payments, credit cards or loan payments.
Combine the total housing payment (PITI) with your other monthly debts. This amount will be used to determine your bottom or debt ratio.
Calculate the bottom (debt) ratio by dividing the total debts and housing payment (PITI) by your gross monthly income. This amount should not exceed the actual bottom ratio allowed by the lender.
$2,335 / $6,850 = 0.34 per cent bottom ratio.
Tips and warnings
- Pay down credit card balances 3 months before applying for a mortgage to reduce the debt ratio.
- Avoid closing credit accounts in an effort to reduce the ratio. This may lower your credit score--another deciding factor for lenders.
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