There are two ratios that many lenders use to qualify applicants for conventional loans. The first ratio compares your total monthly housing costs to your gross monthly income. The most frequently used ratio is that no more than 28% of your gross monthly income should be used for your monthly housing costs. The total monthly housing cost includes payments on principal, interest, real estate taxes, property insurance (P.I.T.I.) and condo or association fees, if any. Some lenders may apply a stricter ratio, such as 25%, especially if your down payment is less than 20%. There are excellent first time home buyer programs available as well as FHA-insured loans that allow buyers to make a smaller down payment. There are also lenders that may apply less strict ratios for borrowers with excellent credit ratings.

The second ratio limits your total monthly debt adding both your P.I.T.I. and long term debt to 36% of your gross monthly income. Your long term debt is debt that will last more than 10 months, such as alimony, outstanding loans (car, appliances, school) and child support payments. Here again if your down payment is less than 20% this ratio may be reduced to 33%.

Different mortgage plans can dramatically affect your monthly payment- thus the price home you can afford. Additionally, other plans, especially FHA and VA mortgages, offer you more liberal qualifying standards- again allowing you more home for your income. If the fixed rates are attractive at the time you are shopping for rates you might want to go ahead and lock in a good fixed rate. If you are expecting your income to increase in the next few years you might want to consider an adjustable rate loan. There are portfolio lenders available that offer better rates for jumbo loans than the rates offered by a conventional lender. A jumbo loan is a loan in excess of $417,000.00 and usually has a higher interest rate than a “conforming loan” (conforming loans are loans that are $417,000 and under). There are so many loan programs available now it is best to talk to several different mortgage brokers to see what plans they have that are best for you.