- A debt ratio is a percentage, or ratio, of your debt divided by your income. Lenders look at two ratios. The first is based on the debt on the property you wish to finance. This includes the total of the loan principal payment, interest, property taxes, homeowner's insurance and any homeowner's association dues. They then divide this by your total pre-tax income. This is your primary (front-end) debt ratio.
- If you add all of your other fixed debts such as auto loans, installment loans and credit card payments to your home expenses and divide that figure by your total income, you will have your back-end, or secondary debt ratio. If you are currently renting another property they add the debt for that property.
In the past, lenders took 75 percent of the rental income and compared that figure to the debt for that property. If the difference was positive it was counted as income. If it was negative, the difference was considered a debt. Different lenders have different debt ratio requirements, but typically they look for around 28 percent for the primary ratio and 33 percent for the secondary ratio.
Recent market conditions as of 2011 have tightened this requirement further, and lenders are beginning to disregard rental income and add the entire mortgage payment, property taxes and insurance as debt. This makes it considerably more difficult to qualify for a loan on another property. - Lenders will verify your income. If you are not self-employed, they will want to see two years worth of W-2s and your two most recent pay stubs. They may also want your tax returns for the most recent two years. If you are self-employed, they will want two years of personal and business tax returns and a profit and loss statement for the period following the closing date of your most recent tax return. They will probably also want to see your last 12 months of personal and business bank statements.
- Lenders look for stable liquid assets such as savings accounts and certificates of deposit. They will count stocks, but they will discount the value based on current market conditions. Since you also have a rental property, they will want to see additional assets. Requirements are typically two times your principal, interest, taxes and insurance, in addition to your down payment on the new home. With the addition of rental property, they want to see four to six months of assets.
- In addition to all of the debt and income requirements you will need an excellent credit score. In the past, 640 was enough to qualify. As of 2011, you will likely need a score of 740 or higher.
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