When purchasing a home it’s essential that a mortgage loan originator determine if you can afford to make the payments on that home over the long term. During the frenzied run up to the mortgage melt down loans were made based on unrealistic debt to income ratios among other devious schemes to qualify a borrower at any cost. With the new rules going into place today a borrower’s total monthly payments for all loans must be less than 43% of their gross income. Here is an easy way to calculate how much income is needed to qualify for a loan.
First, what qualifies as income is only what can be documented and substantiated. If you’re paid under the table for a side job that’s not income. If you can’t back up claims about commission payments, that’s not income. Only what shows on your pay stub or can be substantiated with multiple years of tax returns.
Next, what counts as monthly debt is any recurring payment that you’re obligated to make. Outstanding credit card debt, auto loans, personal lines, child support and alimony are all counted as monthly debt and count against the 43% debt to income ratio. When banks were giving loans to anyone with a pulse some of the tricks they used were to calculate the debt to income ratio based on an introductory teaser rate, a 40 year term, negative amortization and balloon payments. It’s no wonder so many homes fell into foreclosure.
Now to qualify for a loan there is a simple way to calculate it. Using a 30 year term and a 4% interest rate a borrower will need $1,110 in gross monthly income for every $100,000 they want to borrow. But note that these numbers do not include property tax or insurance.
| Loan Amount | Payment | Gross Income Required |
| $100K | $477.42 | $1,110.28 |
| $200K | $954.83 | $2,220.53 |
| $300K | $1,432.24 | $3,330.79 |
| $400K | $1,909.65 | $4,441.05 |
| $500K | $2,387.06 | $5,551.30 |
| $600K | $2,864.47 | $6,661.56 |
| $700K | $3,341.88 | $7,771.81 |
| $800K | $3,819.29 | $8,882.07 |
| $900K | $4,296.70 | $9,992.33 |
| $1M | $4,774.11 | $11,102.58 |
These income levels assume no other monthly debt. If other debt is carried it needs to be added to the gross income required. But to make it a little trickier it’s not the amount of the monthly payment that needs to be added it’s the amount of income needed to cover 43% debt to income ration. For example, if you have a $500 monthly car payment you need $1,163 of income to cover that $500. To calculate the needed income total your monthly payments and divide by 0.43. Then add that to the gross income required.
To get a more granular payment amount this calculator can be used. Then add your other total monthly debt payments and divide the total monthly payment of all debt plus the mortgage payment and divide by 0.43.
Source: Bay Area News Group / Photo: Flickr
