Your Chicago home buying power involves four main things: your income, your down payment, your credit score and your outstanding debt. Even if your debt load is well-managed, it can reduce your home buying power. As far as mortgage lenders are concerned, the more money you owe other people, the less house you can afford to buy!
When a lender is qualifying you for a mortgage, they calculate your buying power based on your “debt-to-income” ratio, or DTI. For simplicity, we’re going to use Conventional mortgage guidelines for this example.
Front-end DTI: This is the percentage of your gross monthly income spent on housing. It includes your principal and interest mortgage payment, plus any private mortgage insurance (if applicable), property taxes, homeowner’s insurance, and any homeowners association fees. For a Conventional mortgage, your front-end DTI – namely your mortgage payment and related costs – should not exceed 28% of your gross monthly income.
Back-end DTI: This is the percentage of your gross monthly income that goes to all reoccurring monthly debt payments, including your projected mortgage payment and any credit card payments, car payments, student loan payments, installment loans, etc. For a Conventional mortgage, your back-end DTI, or total DTI, should not exceed 36% of your gross monthly income. Please note, 36% is considered “ideal,” but most lenders will allow a ratio up to 43%. Some may go even higher, if you have good cash reserves and a strong credit score.
The more outstanding debt you have, the more it will hurt your total debt-to-income ratio. If your financial situation doesn’t fall within the allowable debt-to-income ratio, your mortgage application could be denied. Or, you could be approved for a smaller mortgage amount than you were hoping for.
If you are approved for a mortgage while having a high debt-to-income ratio, you could find yourself paying more in financing costs on the mortgage itself.
If this all sounds a little complicated, don’t worry; it IS complicated! But that’s why we refer our home buyers to the best lenders in the Chicago area. They will take the time to review your situation and find the best mortgage for your needs. Call us for a personal referral at 847-348-1154.
StartingPoint Realty – Serving Chicagoland since 2004!
StartingPoint Realty serves first-time home buyers, repeat home buyers and home sellers throughout the Chicago area. Get an introduction to home buying by attending our free home buying webinar! There’s no sales pressure and no obligation. Contact us for help with your Chicago real estate questions!
Ryan Gable Broker/CEO Starting Point Realty
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