Continuing our discussion of the aspects of the CIA of lending, we turn our attention to income. As you would figure, income dictates exactly how much home you can afford. A San Mateo mortgage lender uses two ratios to determine this.
FRONT END RATIO – HOUSING EXPENSE
The first ratio is your housing expense. A San Mateo mortgage lender will total your principal mortgage payment, interest payment, taxes, insurance, mortgage insurance (if applicable) and home owner association fees (if applicable) and calculate the percentage of your Monthly Housing Expense compared to your Gross Monthly Income. This will make up your front end ratio. The Fannie Mae standard is 28% for your front end ratio.
BACK END RATIO – HOUSING EXPENSE + MONTHLY DEBT
The other ratio, which carries more weight than the front end ratio, is your back end ratio. The back end ratio consists of the housing expenses mentioned above plus all of your monthly debt (credit cards, student loans, car loans, alimony or other monthly financial obligations). This ratio should be equivalent to 36% or less of your monthly gross income.
IDEAL SCENARIO
Here is what an ideal scenario may look like:
Yearly Gross Income: $100,000
Monthly Gross Income: $8,333
Monthly Credit Card Debt: $110
Monthly Car Payment: $364.72
Monthly Boat Payment: $200
Purchase Price: $375,000
20% Down Payment: $75,000
Loan Amount: $300,000
Loan Program: 30 Year Fixed at 6%
Monthly Principal and Interest: $1,847.15
Monthly Taxes: $390.63
Monthly Hazard Insurance: $87.50
Total Monthly Housing Expense: $2,325.28
Front End Housing Ratio: $2325.28/$8333 = 28%
Back End Housing Liability Ratio: $3000/$8333=36%
OK………I know what you are thinking, this is San Mateo, what can you buy for $375,000? But, given the recent market events, there are quite a few properties for less than $375,000 (1746 listings in just San Mateo and Santa Clara County today…want a list? Send me an email.)
BUT WAIT….COMPENSATING FACTORS COUNT
The above ratios are just the industry guidelines and not necessarily the end all be all. With compensating factors, (i.e.…excellent credit score and/or assets) these ratios can be extended. For a San Mateo FHA loan, for example, the back-end ratio is set at 45% and I have seen this pushed as far as 50%. With conventional financing, I have seen the back end pushed to 60%.
If you are curious as to how much of a home you could qualify for, contact me at (650) 520-0915 or info@SanMateoMortgageBlog for a no obligation meeting to determine how far your personal CIA will carry you. What do you have to lose?
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Chris Williamson is a Mortgage Advisor with Mortgage California specializing in San Mateo Mortgage.
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