An Example on Ratios

In the previous post, we talked about what ratios are. Now, let’s look at an example.

Let’s assume that a family has monthly income of $4,000 and monthly recurring bills of $600 including a car payment and credit card minimum payments. They are looking at a $120,000 house. Do they meet the loan standards?

First, the monthly payment on the house, with estimated property taxes and insurance, after a downpayment, is about $700 (example only). The family’s “front-end” ratio – that is, the percentage of income that would be consumed by the house payment – is 17.5%, well under the maximum of 28%.

Next, we’ll add the $700 of proposed house payment to the $600 of recurring monthly debt payments to get $1300 for total monthly payments. Therefore, the family’s “back-end” ration – that is, the percentage of income that would be consumed by the house payment plus other payments – is 32.5%, less than the usual 36% limit. Thus, for this loan, with those ratio requirements, this family qualifies for this house.

Keep in mind that that a significantly higher-priced house would certainly cause a problem on that second ratio.

This is an example of how ratios are used to qualify homebuyers. We’ll look at another example in the next post.

For more information on debt-to-income ratios and how they can affect your home purchase, or just buying your first home, visit our website at www.springfieldfirsthome.com , call/text us at 417.872.9222.