So you're afraid you can't qualify for the house you want due to your income, but absolutely know that you can pay the mortgage each month, regardless of what the lender says.

You may be right.

Lenders use debt ratios, a decimal number arrived at by dividing your monthly debt requirements with your gross monthly income to determine what's affordable. This ratio usually comes in around 38% and includes what lenders call PITI (principal, interest, taxes and insurance) plus your minimum installment and revolving monthly payments. This number, when divided by your gross monthly income will result in your qualifying debt ratio.

It's easier than it sounds.

If your car payment is $200, a student loan is $50 and your minimum credit card payments are $75 you will add $325 to your new monthly housing payment. If your PITI is $800 then your total monthly debt adds up to $1,125. If your gross monthly income is $3,000, then your debt ratio would be 37.5%, just below the 38% ceiling.

But what if your monthly income is say, $2,500? Would you forget it and look for a smaller house? Not necessarily.

Just a few years ago, if your ratio was above the limit, you would have to come up with what used to be called "compensating factors." If you've applied for a loan within the past ten years you may have heard of this term. It's simply the lender's way of saying "Okay, we know your ratios are high but would still like to make a loan. Convince us of why you're a good credit risk and we'll think about it."

The lender would then want to see good cash reserves in the bank, stable employment, the likelihood of increased income, and so on. After review of your compensating factors the lender would (hopefully) grant you a mortgage even though it was technically beyond their ratio guidelines.

Now however, debt ratios and compensating factors play less in the approval process. Debt ratios as high as 50 and above are not uncommon, but with current underwriting techniques your compensating factors are figured in automatically.

What are some of these items that may have an impact on your approvability?

The down payment is one. If you have 3-5% down payment, the likelihood of stretching ratios is small. However, if you have 20% or more, then the lender will be less inclined to turn you down simply due to high debt ratios.

Strong cash reserves are another positive sign. After you write your check for down payment and closing costs, do you have any money left in the bank? If you're searching in the sofa cushions for closing cost money then it's not likely a ratio exception can be made.

Many lenders like to see an amount equal to a minimum of 6 months of PITI as reserve money when considering a ratio exception.

So if a bevy of loan officers and mortgage calculators show that your debt ratios are higher than "normal," don't despair. If you feel confident of your ability to pay, have good credit and can supply a compensating factor or two upon mortgage application, you might just find that ratios mean less than the lender's confidence in your willingness to pay your mortgage on time.

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