The Banks Real Estate Ratio

The banks use a debt to income ratio to determine how much they will lend you.  This ratio consists of two parts:  The first is they will take your total monthly gross income before taxes and multiply it by 28%, which will tell them the total amount of money you can spend for housing expenses (principal, interest, taxies, and insurance).  Then they will take your total monthly gross income before taxes and multiply it by 36% which will tell them the total debt you can afford (including housing expenses), which means they will subtract the number they get from the 28% ratio from the 36% ratio.  This will give them the total monthly debt you can afford.  Now, lets look at an example.  In this example you make $60,000 a year in gross monthly income before taxes.

(1) First we will determine your total gross monthly income.

Total gross yearly income before taxes ($60,000) divided by the months of the year (12) equals your total gross monthly income before taxes ($5,000).

                                 $60,000 / 12 = $5,000

(2) Total gross monthly income before taxes ($5,000), multiplied by the 28% ratio equals the total you can afford for housing expenses ($1,400).

                                  $5,000 x 28% = $1,400

(3) Total gross monthly income before taxes ($5,000) multiplied by the 36% ratio equals the total monthly debt payments you can have, plus the total debt you can have for housing expenses ($1,800).

                               $5,000 x 36% = $1,800

(4) Subtract the number you got from the 28% ratio ($1,400), from the number you got from 36% ratio ($1,800), to get the total monthly debt payments you can have per month ($400).

                             $1,400 - $1,800 = $400

(5) Conclusion:  The total monthly payments the banks will allow you to have for housing expenses is the 28% ratio number of $1,400.  The total monthly payments for all other debt is the number you get when you minus the 28% ratio number ($1,400) from the 36% ratio number ($1,800) which is $400.

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Joshua Fogle

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