Justin Perry's Mortgage Blog

    One of the most concerning issues facing homeowners right now is being able to afford the loan they were qualified for.  I use the term "qualify" lightly.  

    To keep things simple we won't even get into adjustable rates and how someone might qualify for a lower start rate and then slowly get priced out of the loan as the rate trends upwards.   To answer the question of "can I afford this loan?" borrowers must first understand how banks approve borrowers.   Affordability in the banking world is referred to as debt to income ratio.  A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts.  As a rule of thumb, all the expenses on your credit report plus your housing expenses (mortgage, taxes and insurance) can't exceed 45% of your gross income.  And most banks will end there.  

    For example if you make $5,000 a month and you have $1,000 a month in credit card payments and car payments, plus a $1,200 a month mortgage payment that includes taxes and insurance your debt ratio will be 44% and should be low enough to qualify at most lending institutions.   A good mortgage banker will go a few steps further.   Especially when dealing with younger buyers I like to ask them lifestyle questions to make sure they can continue doing the things they love and not be strapped to their mortgage.   For example, if someone is moving into a downtown condo it's important to ask how often they plan on dining out and enjoying all that living downtown has to offer.   Or maybe the buyers are newlyweds and are planning on having children in the near future.  These added expenses aren't going to be reflected in their credit report so they will not be accounted for in the the debt to income ratio. 

    That is why when considering the affordability of a mortgage, borrowers and bankers should discuss what other expenses the borrower has or anticipates having that won't necessarily show up on the credit report.  We all need a place to live but buying a house shouldn't put an end to doing the things we love.