Under the terms of the Dodd-Frank act, as of January 10, 2014 banks will be subject to the Ability-to-Repay Rule – also known as the Qualified Mortgage Rule. One of the provisions of that rule is that a borrower’s total debt liability shall not exceed 43% of their income. Right now the limit is 45%, with exceptions made in some cases.
What does that mean in dollars? If your monthly income is $10,000, your total monthly debt can now be no more than $4,500. After January 10 that number will be reduced to $4,300. In terms of a 30-year Mortgage loan at 4.5% interest, that $200 reduction in available debt reduces your maximum loan amount by about $40,000. That number will fluctuate based on the interest rate, with a higher interest rate dictating a smaller loan amount.
How is your debt to income ratio calculated?
It begins with your income before taxes are withheld.
From that you must deduct:
- All payments that would show up on your credit report. For instance, car loans, credit cards, and payments on any other real estate you own.
- Taxes, insurance, and HOA fees on that other real estate.
- Child support or Alimony
- Any business loss shown on your income tax return
- The new Mortgage payment
- Taxes and insurance
- HOA fees
What should you do?
Before you begin to shop for your new home, call us and get pre-approved for your mortgage loan. Then you’ll know just how much you can spend based on your present debt, your credit scores, and the amount you’re able to furnish as a down payment.
A $200 increase in your debt to income sounds like a small amount, but when it translates into a $40,000 difference in the price you can pay for a new home, it’s significant. So if it looks like the new debt to income ratio rules will put you just out of reach of your dream home, begin now to put aside more money for a down payment and to reduce amounts owing on other consumer debt.
One warning: Don’t make major changes in your financial situation until you’ve talked with your loan officer. It sounds backward, but paying off a credit card could have a negative impact on your credit scores, and that in turn could impact your interest rate and mortgage payment.
And of course, don’t take on any new debt or increase the outstanding balance on any credit lines. That will not only change your debt to income ratios, but can reduce your credit scores and thus raise your interest rate.
We at Homewood Mortgage finance homes anywhere in Texas, and we promise low rates, low fees, and prompt service. So if you’re thinking of becoming a Texas homeowner, call us at 1-800-223-7409 or apply on line at http://www.mikeclover.com/ We’ll be glad to get you pre-approved and ready to submit that winning offer.
There’s no application fee, and no obligation.