Mortgage Loans – How Much of a House Can I Afford?
So what do lenders consider part of your total monthly debts? Typically it includes the minimum monthly payments on all debt, including car loans, Mortgage Loans, leases, credit cards, and personal loans.
Monthly alimony and child support, which are not debts, are also included. However, it doesn’t include daycare, utilities, children’s education, life/disability/automobile insurance, or dollar shave club, for example.
Your expected TOTAL home payment, including your PITI or Principle, Interest, Taxes, and Homeowner’s Insurance, is also included. You may need your loan officer’s or real estate agent’s help to figure out your total monthly debts.
Medical students and residents who are about to graduate will understandably wonder whether their student Mortgage loans will be taken into account after they begin making payments on them. Unfortunately, there is no simple answer to this question.
Unless you can demonstrate that you are on a special payment plan for the next 12 months, a traditional loan will include the full monthly payment on your student loans in the debt ratio. The challenge with this is that proof is typically unavailable to a graduating medical student.
Determining your total monthly income can be challenging, but there are specific rules to help guide you. Base income, whether it’s a W-2 or 1099, is usually included ask your loan officer if their company counts 1099 income.
Non-guaranteed income must have been earned for at least two years to be included. For example, an ER doctor employed as an independent contractor with a guaranteed $250,000 annual salary based on contracted shifts can count that income in the debt ratio. However, if the doctor does not show a history of receiving that income over the past two years, it won’t be counted.
As I mentioned at the beginning, there are other things to think about aside from the DTI (debt-to-income) ratio. Just because you can get a $2 million mortgage for $430,000 doesn’t mean you should. You should not determine how much house you can buy based on your lender’s 50% DTI ratio.
The biggest difficulty physicians encounter when purchasing a home is determining how much they can spend. Many physicians, from residents who earn $55,000 a year to those who earn much more, are unsure of the answer. There can be different answers, depending on financial and lifestyle factors—neither is wrong, and both should be considered when trying to purchase a home.
The debt-to-income calculation, also known as the debt ratio or DTI determines how much debt a person can bear, and the result is then used to establish the maximum Mortgage loans amount a person qualifies for.
A consideration of lifestyle, on the other hand, is based on a more comprehensive view of your finances and financial goals. The DTI is a simple ratio in which total monthly debts are divided by total monthly income.
The minimum viable DTI can vary between lenders, even for the same loan product. For example, a 50% debt proportion might be permitted on a physician house loan from one company, but a 45% debt ratio might be the maximum from another.
The term rental income is frequently mentioned when determining what is included in income. There are several rules you should be familiar with. According to tax returns, you may only include rental income if you have a two-year history of it.
If you plan to rent out your current house after you purchase a new one, your expected rental income will not be included, even if you have an agreement in place to rent it once you move out. In most cases, less than 75% of the rent will be considered by an underwriter to account for vacancy and turnover.
After establishing your DTI, you can then figure out how much money you can borrow by plugging in the maximum monthly payment for your home expenses.
For example, if your monthly principal and interest combined was $2,000, your loan amount would be approximately $430,000. You can calculate this amount yourself by going to a mortgage calculator or having your loan officer do it for you.
Remember, there are other factors to consider besides DTI. Even if a lender offers loans for individuals with a 50% debt-to-income ratio, it’s not a recommended setup for financing. But it’s helpful to know how much you are eligible for, to guide your search for your next home.
We are not a lending company. We help you find the best physician loan on the market.
You can find doctor loans through an online tool like Dr. HomeFinance that compares multiple lenders for you. Simply select which state you are looking at living in and see how big of a house is the best for physician mortgage lenders.