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Shenandoah Real Estate

PO Box 1032

18 Dunsmore Road

Verona, VA  24482

(540)248-2532

(540)248-4100 - fax

Loan & Mortgage

If you’re considering a home purchase in the near future – or within a few years – you should brush up on your mortgage knowledge. Learn what to do before applying for a mortgage, what to watch for during the process, and how to use a mortgage after you’ve bought your home.

Your Credit is Crucial

A mortgage is a big deal. The bank risks a lot of money, and they have been increasingly cautious since the subprime mortgage debacle. To qualify for a mortgage, good credit is essential.

Credit Score Basics

Credit scores are designed to make it easy on lenders. They need to decide whether or not to approve your loan. Instead of manually reading through your credit reports, they can just look at a number: your credit score.

The number is generated by a computer program that reads through your credit reports. It slices and dices the data stored at the credit bureaus and spits out a number. Just like a human, the computer program is checking to see if you’ve borrowed in the past and if you generally pay as agreed.

Debt to income ratios give lenders a quick rule of thumb to determine how much you can borrow. They try to keep loans affordable by keeping payments to a modest percentage of your total income. With debt to income ratios, they can quickly figure out a reasonable monthly payment – and use that number to calculate your total loan amount.

Debt to Income Ratio – Housing Expense

Your housing expense ratio is a debt to income ratio measuring the percentage of your income that covers housing payments. Housing payments consist of pretty much everything in your monthly payment – principal, interest, taxes, and insurance (PITI).

Lenders set certain limits on where they want your debt to income ratios. For example, they might say they want your housing expenses to be less than 28% of your gross monthly income.

Example

Assume you earn $3,000 per month (gross, or before taxes), and your lender wants your debt to income ratio to be below 28%

3000 x .28 = 840

Your lender wants you to spend $840 or less per month on housing expenses.

The housing expense ratio is sometimes called the “front” debt to income ratio.