How Much Debt Can You Have To Buy A House?
- Joe Thomas
What Really Matters Is Your Debt-to-Income Ratio – The first thing you need to know is your debt-to-income ratio. This is your total monthly debt payments divided by your monthly gross income. It is one of the most important factors lenders will consider when determining your capacity to make monthly payments.
- FHA loans typically need a debt-to-income ratio of 43% or less, including the anticipated additional mortgage payment.
- The USDA requires a debt-to-income ratio of 41% or less.
- In most cases, conventional mortgages demand a debt-to-income ratio of 45% or less, however you may be authorized with a ratio of up to 50% in extremely limited circumstances.
How much debt-to-income ratio is acceptable to buy a home?
Ideal mortgage debt-to-income ratio – Most traditional loan lenders are concerned with your back-end ratio. Some lenders can accept a DTI of up to 50 percent provided the borrower has offsetting variables, such as a savings account with a balance equivalent to six months’ worth of housing expenditures.
Although some lenders may tolerate DTIs as high as 50%, the lower the better. Regarding your front-end and back-end ratios, lenders typically want front-end ratios of no more than 28 percent and back-end ratios, which include all monthly obligations, of no more than 36 percent. With a gross monthly income of $6,000, the maximum monthly mortgage payment at 28 percent is $1,680 ($6,000 x 0.28 = $1,680).
At 36 percent, your total monthly loan payments should not exceed $2,160 ($6,000 multiplied by 0.36 equals $2,160). In fact, though, lenders may accept larger percentages based on your credit score, amount of funds, and size of the down payment. Limits vary based on the lender and the loan type.
The suggested front-end ratio for FHA loans is 31%, and the recommended back-end ratio is 43%; however, like with conventional loans, there are exceptions that may exceed the limit. In order to qualify for a USDA loan, your front-end and back-end ratios must be below 29 and 41 percent, respectively. There is no maximum DTI limit for VA loans.
The optimal back-end ratio, however, is less than 41 percent. If your ratio exceeds the threshold, you may still be authorized based on other reasons.
By Stephen Sellner | Citizens Bank Staff Calculating your debt-to-income ratio (DTI) is the most frequent method for assessing your overall debt. The ratio of your monthly total debt commitments to your monthly gross income (before taxes), represented as a percentage.
Should one be debt-free prior to purchasing a home?
In conclusion, paying off credit card debt is one strategy to put yourself in the best possible position to obtain a mortgage. If your credit and finances are in good shape and you wish to purchase a home soon, you may not need to eliminate credit card debt.