Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Calling Mortgage Experts (or non-experts, doesn't matter)
Old 10-09-2007, 06:07 PM   #1
Dryer sheet wannabe
 
Join Date: Oct 2007
Posts: 11
Calling Mortgage Experts (or non-experts, doesn't matter)

So I've been reading that most lenders don't like a back end (debt to income) ratio of anything greater than 36%. I'm assuming that this 36% is what most online calculators use to compute your "home affordability". I've read the BE ratio is comprised of debt such as mortgage payment, school loans, auto loans and credit card payments.

My question is, is this 36% number adjusted so that the remaining cash (64%) can be used for other expenses such as utilities, groceries and gas and also for savings?

Let's say I were to charge all my groceries and gas onto my credit card which I pay off in full monthly. But that also raises my monthly CC payments by...say $500 per month. Should I deduct that $500 from my CC payment portion of debt in order to accurately calculate my BE ratio? Let's go to the extreme and say I put everything I possibly can onto my CC (entertainment, dining out, etc) and my balance is $1500 per month, that I'm able to pay off full every month...should I still only deduct that $500 portion used for true recurring expenses and say I have $1000 in CC debt per month to go into the BE ratio?

Am I understanding BE correctly?

Thanks for the input
__________________

__________________
034runner is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-09-2007, 06:18 PM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
The Back end ratio is just the ratio of total debt to income. Your question concerns how a credit card that is paid off monthly effects the calculation. It is my understanding that the average monthly balance on the card is added to the BE total debt calculation.

So if you are trying to buy a home, it just might be prudent to use cash and checks for a few months before the loan is approved and funded. In that way the back end ratio will not be adversely affected.

By the way there are still loans to be had in which the back end ratio can be greater than 36 percent. So shop around.
__________________

__________________
MasterBlaster is offline   Reply With Quote
Old 10-09-2007, 06:30 PM   #3
Dryer sheet wannabe
 
Join Date: Oct 2007
Posts: 11
Quote:
Originally Posted by MasterBlaster View Post
The Back end ratio is just the ratio of total debt to income. Your question concerns how a credit card that is paid off monthly effects the calculation. It is my understanding that the average monthly balance on the card is added to the BE total debt calculation.

So if you are trying to buy a home, it just might be prudent to use cash and checks for a few months before the loan is approved and funded. In that way the back end ratio will not be adversely affected.

By the way there are still loans to be had in which the back end ratio can be greater than 36 percent. So shop around.
I guess that's what I'm getting at. I know I don't need to use a CC but I do for the cash back I get. So I'm guessing from your post that my initial post is correct. I can get away with 0 CC payment each month...just don't use it, but again, I choose to get that "free money" by using it. So I could just put in a much lesser amount on the calculator than what I'm currently paying, perhaps even 0. I figured that remaining 64% had to go to "necessary" expenses and savings.
__________________
034runner is offline   Reply With Quote
Old 10-09-2007, 06:43 PM   #4
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,905
If it is possible in your situation, I would strongly recommend keeping the ratio down a little lower so as not to be "house poor". I know it's not possible in some locations, and if that is your situation then my sympathies.

But if you are in an area with lower housing costs, like many parts of the South, then I would urge you to consider a smaller home with the objective of keeping it below 0.28 if you can. In my case, buying my home at a ratio under 0.21 has been tremendously helpful.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 10-09-2007, 06:49 PM   #5
Dryer sheet wannabe
 
Join Date: Oct 2007
Posts: 11
Quote:
Originally Posted by Want2retire View Post
If it is possible in your situation, I would strongly recommend keeping the ratio down a little lower so as not to be "house poor". I know it's not possible in some locations, and if that is your situation then my sympathies.

But if you are in an area with lower housing costs, like many parts of the South, then I would urge you to consider a smaller home with the objective of keeping it below 0.28 if you can. In my case, buying my home at a ratio under 0.21 has been tremendously helpful.
Pittsburgh is about as good as you can get for a metro area. My 120k house is worth over double that in Philly.

And you're post makes my calculations that much more interesting. By using the 0 CC debt calculation, the house we are looking to build hovers right around that 28% mark. Now you can see why I want to be so sure that I'm well within my means by asking this question. I've spun it every different way and each works out well, but there's always that part of me that wants to think that I'm missing something.

10833 * .28 = 3033 - car (600) - school loan (222) = 2211 --> spot on to what we want, without CC debt

What's also a bonus is that I live in the city and pay a ridiculously high local tax. Moving out of the city will save me another $200 per month.
__________________
034runner is offline   Reply With Quote
Old 10-09-2007, 08:08 PM   #6
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,405
The back end ratio is usually calculated to include the minimum monthly payments on all of your outstanding debt, which would include your prospective mortgage, car payments, student loan payments, personal loan payments, and credit card payments.

If you have a $10,000 debt on a credit card because you bought a motorcycle with it, and you don't have the money to pay it off, then the minimum payment for that credit card would be added in to your back end ratio.

If you just use a credit card for regular monthly expenses and pay it in full every month, then in my experience the bank will accept excluding that credit card balance and it's associated monthly minimum from your back end ratio.

People's credit card usage patterns can change over time, obviously, so your situation could be a mixture of the two. It sounds to me like you are squarely in the second camp, so I would think the bank should be OK with you excluding that credit card debt from the calculation. Discuss it with them, though.

Also, note that they base your back end ratio on the minimum payments due, not what you are actually paying. Since the minimums on most credit cards are at 2%, even if you were charging $5,000 per month your minimum payment would only be $100. Based on your $500 payment figure in your first post, that would mean you're spending $25,000 per month on your card. Doubtful that's the case if you're only making $10,833 per month.

Also, if you're going to build a house and haven't broken ground yet, I would count on at least 20% more than the price you're looking at now. BTDT.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-10-2007, 06:27 AM   #7
Dryer sheet wannabe
 
Join Date: Oct 2007
Posts: 11
Quote:
Originally Posted by SecondCor521 View Post
The back end ratio is usually calculated to include the minimum monthly payments on all of your outstanding debt, which would include your prospective mortgage, car payments, student loan payments, personal loan payments, and credit card payments.

If you have a $10,000 debt on a credit card because you bought a motorcycle with it, and you don't have the money to pay it off, then the minimum payment for that credit card would be added in to your back end ratio.

If you just use a credit card for regular monthly expenses and pay it in full every month, then in my experience the bank will accept excluding that credit card balance and it's associated monthly minimum from your back end ratio.

People's credit card usage patterns can change over time, obviously, so your situation could be a mixture of the two. It sounds to me like you are squarely in the second camp, so I would think the bank should be OK with you excluding that credit card debt from the calculation. Discuss it with them, though.

Also, note that they base your back end ratio on the minimum payments due, not what you are actually paying. Since the minimums on most credit cards are at 2%, even if you were charging $5,000 per month your minimum payment would only be $100. Based on your $500 payment figure in your first post, that would mean you're spending $25,000 per month on your card. Doubtful that's the case if you're only making $10,833 per month.

Also, if you're going to build a house and haven't broken ground yet, I would count on at least 20% more than the price you're looking at now. BTDT.
Nice post, thanks.
__________________

__________________
034runner is offline   Reply With Quote
Reply

Tags
mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Who is your team of experts? Peaceful_Warrior Young Dreamers 30 01-30-2007 07:14 PM
Market Experts frayne FIRE and Money 24 06-09-2006 04:30 PM
Any Phone Panel Block 66 experts out there?..... Cut-Throat Other topics 12 04-28-2006 11:14 AM
Question for the portfolio experts Niko FIRE and Money 16 07-12-2005 08:27 AM
Financial 'Experts' - Rate of Return .......... Cut-Throat FIRE and Money 2 06-16-2004 10:47 AM

 

 
All times are GMT -6. The time now is 09:21 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.