Debt to Income Ratios, accurate?
A debt to income ratio is a guideline used by lenders to determine your maximum mortgage amount. It’s calculated as a percentage of your monthly gross (before taxes) income that is used to pay your monthly bills or debts. There are two types of calculations, a “front” and “back” ratio which lenders use to determine your maximum loan amount.
The front ratio is a percentage of your current housing costs. Anything related to your housing costs including rent, mortgage principal, interest, taxes, insurance, etc. will be included. The back ratio is calculated the same, but also includes all of your consumer debt payments. Items such as credit cards, student loans, car loans, or other similar debt payments.
A typical debt to income ratio is front 33% and back 38%. These percentages are just base guidelines and leders will be more relaxed or strick on lending based on other financial factors. A larger down payment and high credit scores will allow the lender to be more relaxed. Smaller or no down payment and bad credit will cause the lender to be much more strict with their lending power.
So with these base percentages if you have a combined monthly bring home pay check of $6000 a month your maximum monthly housing expenses should be no more than $1980 and your consumer credit expenditures should be no more than $2280.
So how accurate are these debt to income ratios? Should you depend on these nubers when you decide to purchase your next home? Remember these are just guidelines to follow and everyone’s financial situation is different. Debt to income ratio calculators don’t consider many other monthly expenses such as chariatable contributions, day care, food, enertainment, etc. They only assume the remaining percentage of income will cover these expenses. You should complete a detailed monthly budget before purchasing your next home. Make sure you can afford the payment and don’t take a lenders word!
Categories: Personal Mortgage Articles Tags: back score, bills, calculator, consumer, credit, debt to income ratio, front score, monthly debt
Piggyback Mortgage Loan Information
A piggyback loan is a mortgage loan in which the financing is handled by two different lenders. The first lender finances a large portion of the loan, usually 80% and another seperate lender finances the remaining balance of the loan. There are three common options of piggyback loans, 80-10-10 loan, the 80-20 loan (also known as the 80-20-0 loan) and the 80-15-5 loan.
An 80-10-10 loan is when the first mortgage finance company finances 80% of the loan amount, the second finance mortgage company finances 10% of the loan balance and 10% of the balance is paid down by the purchaser. The 10% financed by the second lender is basically a second mortgage on the home.
An 80-20 loan is when the first mortgage finance company finances 80% of the loan amount and the second lender finances the remaining 20% of the loan as a second mortgage. No down payment is paid by the borrower or there is already some equity in the home.
The final typical type of piggyback loan is the 80-15-5. The first lender finances 80% of the mortgage balance. The second lender finances a second mortgage for 5% of the loan amount and 5% of the balance is paid down by the buyer.
The biggest pro of a piggyback loan is that 20% of the home value is paid for through a down payment or by the second lender. This means that the first mortgage lender doesn’t charge PMI or private mortgage insurance. Private mortgage insurance is a third party insurance required by lenders if you do not have 20% equity in your home. It protects lenders from borrowers in case they file bankrupsy. A piggyback loan reduces the loan risk of the lender because they aren’t financing the entire amount. Avoiding PMI can save you hundreds of dollars per month depending on the equity and financing terms.
There are three major cons of a piggyback loan. First, you already have a second mortgage on your home. If you ever have an emergency where you need to use your home as equity it will be very difficult since you already have a second mortgage on your home. The second major con is that the second mortgage will haev a higher interest rate than a normal loan with PMI. Sometimes the interest rate can be 2% or 3% higher. Even though your monthly payment may be lower you will end up paying more for the loan in the end. The third major con is that PMI drops off after you have 20% equity in your home. This could happen quick if you overpay your minimum monthly payments. If you don’t have a piggyback loan your payment will decrease once PMI drops off, with a piggyback loan you are stuck with the second mortgage payment until it’s completely paid off.
In my oppinion in most cases you are better off to avoid a piggyback loan. Even though you will have a smaller monthly payment up front you will pay more in the end. Do the math for you own individual situation before you close the loan!