Homeowners will borrow up to 80 percent of their home's value, and possibly even more if they could for a project. That's why there are strict rules on who can borrow, and that number is based on various factors, including your debt ratio. The debt ratio will drastically affect your borrowing power. There are a few things that you will have to understand in order to figure out the probability of getting a loan and what your interest rate should be. Based on your credit history, income and other factors, your interest rate and loan amount will change.
The bank wants to make sure that you can afford the loan, which is why debt ratios exist. The way that they try to see your ability to repay is through your total debt amount. The lender wants to make sure that your debt doesn't exceed a certain percentage of your income, usually between 32 percent and 45 percent. This percentage is referred to as the debt ratio.
If you make about $3,000 a month with absolutely no debt, then the bank would figure that you weren't overextended as long as your mortgage payments, including insurance and taxes, also didn't exceed the amounts of $1,260 and $1,080. In most cases, this is an ideal situation, as most homeowners have some fort of debt. That doesn't mean you will be denied for a loan but it will definitely affect your debt ratio.
If you have $5,000 total in monthly income and you have $2,000 in monthly debt, then that means you have $3,000 to spend. However, it doesn't work that way with debt ratios. The banks want you to have no more than about 38 percent of your income as debt. So if you have $5,000 a month in income then $1900 is available for total debt. If you already have $2,000 in debt, you're already over the allowance.
Basically, if you have $3,000 in monthly income with no doubt, you can expect a mortgage payment of $1140 a month to be reasonable if you are getting a second mortgage. If you have $5000 a month with $2,000 a month, it's going to be hard for you to afford any high loan amount payment or mortgage payment than what you already owe. There is a lot of conjecture of whether this is fair or not for homeowners, but this is the way that banks lend money.
You can use a debt ratio calculator to figure out your own debt ratio. The figure that you'll need to get together is your monthly income and the total amount of your monthly debt. You can use this calculator to figure out the rest.
If your debt ratio is more than 38 percent, then you don't have a choice for lenders. The bank won't give you a loan when your debt is too high. You must pay down your debt first.
If your current debt ratio is more than about 20 percent, you have a few choices. With a higher debt ratio, you can still get some loan amounts but it's expected that you'll have a higher interest rate. You can pay down your debt below 20 percent and get a better deal.
If your debt ratio is less than 20 percent and paying down your debt would mean that you can't make a 20 percent payment, you should keep your money and make the 20 percent down payment. This way you can lower your interest rate and payments as well as get the right loan for your home remodel project.