Hopefully this answer helps you. Please let me know if I can be of further assistance.
Reserves includes cash and 401k IRA . The lender is assuming less of a risk if you have 30 months of mortgage payments in the bank than if you haveonly two. After all, employment is not guaranteed,
In calculating the reserves they use 100% of savings in the bank and only 70% of retirement funds since you will incur taxes and penalties for withdrawing those.
However, you should keep one thing in mind, just because you can get approved with a debt ratio of 50, it doesn't mean that you will feel comfortable making that payment every month. Take everything into account, your other monthly payments, your life-style, what you spend your money on, and come up with an amount that you would like your monthly PITI payment to be.
Alan- I guess I'd forgotten that loan to value is also a factor! For what it is worth, we plan to put around 30% down- maybe 120-130K on a 400-430K property. When you say reserves, does this necessarily mean cash savings, or do other resources (Roth & 401K) factor in, as well?
Housing payment included principle interest taxes insurance and PMI (if applicable).
You can safely assume that with strong credit you can go to 45% and by exception to 50% with compensationg factors such as lower loan to value or lots of reserves.
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