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When they're underwriting mortgages, banks consider your debt-to-income ratios. Although HOA dues don't add to your debt load, looking for a home that doesn't have any HOA dues could help you improve your debt-to-income ratio -- and qualify for a bigger mortgage. Here's why.
Your Debt-to-Income Ratio
Your debt-to-income ratio shows your current debt load compared to your current income. It's typically expressed as a percentage.
To calculate your own ratio, total your monthly debt payments and your monthly income, and then divide the first number by the second. To get a percent, multiply the total by 100.
For example, assume you have a credit card payment of $100 per month, another of $250 per month and a student loan payment of $100 per month, and you make $3,000 per month. Your total monthly debt payments would be $450, and your debt-to-credit ratio would be 15 percent ($450 / $3,000 x 100).
Mortgage's Maximum Debt-to-Income Ratio
Most mortgage programs have maximum debt-to-income ratios, in which housing-related debts are broken out. If a mortgage would put your total debt load or housing-related debt load is over the allowed maximum for the loan program to which you're applying, you won't be approved.
For FHA loans, the maximum ratio is typically 29 percent for housing-related debt and 41 percent for all debt. Other loan programs have stricter requirements, with some limiting housing-related debt to 28 percent of income and total debt to 36 percent.
These housing-related percentages include several payments:
Insurance payments, property taxes and HOA dues are included, even though they aren't technically debt payments, because they must be paid on time like debt payments.
Eliminating HOA Dues Lowers Your Ratio
You can't avoid paying insurance payments and taxes on a home, since any home you look at will have these. Not all houses, however, have HOA dues.
By looking for a home without any HOA dues, you can improve your housing-related debt-to-income ratio. Only four payments, instead of five, will be factored in. As you lower your debt-to-income ratio, you'll be able to qualify for a bigger mortgage and still stay under the maximum housing-related percentage.
To see how much more you might be able to borrow by purchasing a home that doesn't have HOA dues, contact a mortgage broker. They'll be able to run a few scenarios and show you how your housing-related debt-to-income ratio changes with and without HOA dues, and how the ratio's change affects how big a mortgage you can get.
Share30 March 2016
