Debt-to-income ratio plays an important role in determining your mortgage affordability just as your credit score does. Lenders evaluate your capacity to repay a mortgage loan by seeing your debt-to-income ratio (DTI). The ratio helps you to find out how much you are spending every month for making debt payments and as compared to your income. It also indicates the cash you are left with after meeting the minimum financial obligations.



Availing credit is very much in vogue these days. Not that people take it without any reason. With the economic slowdown the number of foreclosures have increased manifold. It is not always that borrowers who have not been regular with payments face foreclosure. There are many borrowers who despite making regular payments are on the list of homeowners whose property is being foreclosed. There may be several unforeseen events that may compel you to stop payments all of a sudden.





What is the 28/36 rule?

Debt-to-income ratio is made up of a front ratio and a back ratio. Here, 28% or 28 indicate the front ratio. It shows how much money you are spending every month for making payments towards interest, loan principal, hazard insurance, PMI or private mortgage insurance, and property taxes etc.



The number 36 or 36% indicates the amount you have to shell out every month for recurring debt (car loans, credit card payments etc) as well as your housing expenses. This rule is usually followed in the mortgage industry and has helped many consumers to stay away from risky loans.



Understand your affordability:

You may come across lenders who force you to avail mortgage more than you can afford by manipulating your income and other documents even though your debt-to-income ratio doesnt allow you to do so. Dont fall into a trap and dont get tempted by their offer. Subprime mortgage lending was one of the reasons that triggered subprime mortgage crisis and the subsequent global recession.



Obamas Homeowners Affordability and Stability Plan:

President Obama recently introduced the Homeowners Affordability and Stability Plan and the Loan Modification Plan to help approximately 9 million households with their existing mortgage loans. However, financial analysts have stated that the mortgage bailout program has certain potential problems and may not be able to offer assistance to all homeowners. The loan modification program allows borrowers to change the existing terms of their mortgage by changing the interest rate, lowering the principal balance or extending the loan term as per the requirement of the borrower.