Most bad credit mortgage loans require a debt-to-income ratio of no more than 36 percent. What this means is that you can’t spend more than 36 percent of your monthly income on your mortgage payment. These ratios will vary. Some will require a ratio of 28 percent and most require a debt-to-income ratio of 33 percent.

To determine how much you can qualify for, you will need to know the following things:

• Gross monthly income
• Monthly debt – how much do you owe on credit cards, car payments, student loans, other debt

Take your gross monthly income and multiply it by .36. For example, if my monthly income is $5000, I’d multiply that by .36 to get $1800. Next, subtract your monthly debt payments. So if your total monthly debt is $600, subtract that to get a total of $1200. This is roughly how much of a monthly payment you can afford. Other factors will need to be included as well such as the property taxes, any homeowners dues and other fees related to the property.

To determine the total cost of the house you can afford, at 6%, it is roughly $6 per thousand. So a $200,000 would be $1200/mo. This does not include any closing costs or points rolled into the total amount of the loan.

Mortgage loans for people with bad credit may have looser requirements for income. You may be required to provide proof of income, or you may be able to do what is called “stated income”.  It all depends on the kind of bad credit mortgage loan program you can qualify for. Some mortgage loans with bad credit require a larger downpayment in exchange for lower debt to income ratio. Others have relaxed standards on downpayments in exchange for strict proof of income reporting.

In general however, mortgage loans for bad credit still have the same 28 to 36% debt-to-income ratio requirements that other traditional lenders have. When applying for a loan, don’t make any changes that can impact the level of your income.

In the next article, we’ll discuss specific types of mortgages for people with bad credit.

Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit

Here is a list of all the articles in this series:

Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit


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