Mortgage lenders use the mortgage debt ratio to determine if a borrower can make monthly payments. The ratio is calculated by dividing monthly income by expected mortgage payments. Other debts are also factored in to determine the payback ratio, which should not exceed 30%. Anything above 40% would likely result in a loan refusal.
The mortgage debt ratio is used by mortgage lenders to see if prospective home buyers have the ability to make monthly mortgage payments. This ratio is calculated by taking the monthly income earned by a borrower and dividing it into the expected monthly mortgage payment. A more stringent form of mortgage debt-to-GDP ratio also takes into account the debt already owed by a borrower each month and adds it to the mortgage payment. Mortgage lenders generally require borrowers to maintain a specific relationship before considering a mortgage.
Most prospective home buyers don’t have the money to purchase homes without some sort of financial aid. This help usually comes in the form of a mortgage, where a bank or other certified mortgage lender provides a loan to enable the borrower to purchase a home. The borrower must provide a small down payment, then repay the loan, along with interest at a predetermined rate, in monthly installments. Because a mortgage lender is at risk of losing their investment if the borrower defaults, a mortgage debt ratio can be used to determine the borrower’s financial standing.
As an example of a mortgage debt ratio, imagine that a lender is scheduled to provide a mortgage that will cost the borrower $1,000 United States Dollars (USD) in monthly mortgage payments. The borrower has a monthly income of $4,000 USD. This means that your mortgage payments-to-earnings ratio, also known as anterior ratio, is $1,000 USD divided by $4,000 USD, which equals 25 or 25 percent.
Mortgage lenders will also want to know about other debts a borrower has, as this will also affect their ability to repay the loan. Consequently, the payback ratio is calculated by adding this extraneous debt to the amount owed on the mortgage. Using the example above, imagine the borrower also had $500 USD of monthly debt from credit card payments. This would be added to your mortgage payment of $1,000 USD for an expected total monthly debt of $1,500 USD. The $1,500 USD would then be divided by the monthly income of $4,000 USD to get a return ratio of 375, or 37.5 percent.
While different mortgage lenders have different standards and may take other factors into account, they typically require a certain mortgage debt ratio before proceeding. For a frontal report, the percentage should not exceed 30%. Anything above a 40% return ratio would likely cause lenders to refuse a mortgage loan.
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