Qualifying Ratios for Mortgage Pre-Approval

Buying a home is an exciting process to embark on. It is a time to dream about your future home and the memories you’ll make in it, but also a time of holding your breath hoping that everything will go smoothly. Once the trusted real estate professional to help them navigate the market is on board, then they are faced with the seemingly daunting task of securing a mortgage pre-approval.

Outside of their employment, income, and financial information, most mortgage applicants aren’t sure what is being considered on their mortgage application. These qualifying ratios will help you to understand some of the deciding factors in the mortgage pre-approval process.

Debt to Income Ratio

Your debt to income ratio is one of the biggest contributing factors for your mortgage application decision. A debt to income ratio is the comparison of how much your gross monthly income is in comparison to your monthly debt obligations.

The debt to income ratio is calculated by dividing the total monthly obligations by your gross monthly income, your income before taxes are deducted. The chart below illustrates a couple of debt to income ratios.

Most mortgage underwriters prefer to see a debt to income of 50% or less, although exceptions can be made. If your debt to income ratio is too high, your mortgage loan officer may ask you to consider paying off some debts and eliminating their payments to get approval, or to consider applying for a lesser mortgage amount.

Unsecured Debt Ratio

An Unsecured Debt Ratio is another number used to determine the credit worthiness of a loan applicant. The unsecured debt ratio compares the amount of unsecured debt an applicant has in comparison to their gross annual income. It is calculated by dividing the unsecured debt amount by the gross annual income.

The chart below gives some examples of unsecured debt ratios.

The unsecured debt ratio is used to analyze the financial habits of an applicant. Are they stretched too thin financially? Do they rely on credit to subsidize their lifestyle, making them more vulnerable to defaulting on loans? If an unsecured debt ratio is too high underwriters can give a conditional mortgage approval requirinG some debt be paid off, or they can decline the loan application.

These ratios are tools that you can use before applying for a mortgage to see where you stand financially. They can help you to decide when to apply for a mortgage by gauging whether or not you are financially ready. Use these ratios to get a sense of where you are and develop a plan to get yourself in the best financial condition for you upcoming mortgage application.