The "top" debt ratio is defined as:
Top Debt Ratio = Monthly Housing Expense/Gross Monthly Income

By "monthly housing expense" we mean either the borrower's monthly rent payments, or if she owns her own home, the total of the following -

Monthly Housing Expense
1st mortgage payment on home plus
Real estate taxes (annual cost/12) plus
Fire insurance (annual cost/12) plus
Homeowner's association dues(if home is a condo or townhouse) plus
Second mortgage payment (if any) plus
Third mortgage payment (if any).

You will often hear the term P.I.T.I. It refers to (P)rincipal, (I)nterest, (T)axes and (I)nsurance. While P.I.T.I. is not exactly the same as Monthly Housing Expense because it does not include Washington homeowner's association dues, the two terms are often used interchangably.

Washington Lenders have learned over the years that a borrower's "top" debt ratio should not exceed 25%. In other words, a person's housing expense should not exceed 1/4 of his income. While lenders will often stretch this number to as high as 28%, traditional lending theory maintains that anyone with a debt ratio in excess of 25% stands a good chance of developing budget problems.

The second ratio that lenders use to determine if a borrower can afford her obligations is the "bottom" debt ratio. It is defined as follows:

Bottom Debt Ratio = (Total Housing Expense + Debt Payments)/Gross Monthly Income

The only difference between the two ratios is the inclusion in the numerator of "debt payments." Debt payments include the following:

Debt Payments
Car payments
Charge card payments

Payments on installment loans, for example - a payment on a washer & dryer that the borrower purchased.
Payments on personal loans, for example - a signature loan from the borrower's bank.

What is not included in "debt payments" is Utilities such as PG&E, water or telephone and payments on real estate loans. Real estate loans are usually offset first by the net rental income from the property. If the borrower has a net positive cash flow from all his rentals, then the net income is usually added to his "gross monthly income." If the borrower has a net negative cash flow from all of his rental properties, then the amount of the negative cash flow is usually added to the numerator of the "bottom" debt ratio as if it were a monthly debt obligation, like a car payment.

Traditional lending theory maintains that a borrower's "bottom" debt ratio should not exceed 33 1/3%. In other words, the total of the borrower's housing expense and debt obligations should not exceed 1/3 of his income. Lenders often will stretch on this ratio to as high as 36%, and some have even been known to stretch as high as 40% or more. Obviously a loan with a debt ratio of 40% is a far more risky loan than a loan with a debt ratio of 32%.

- Washington Construction Loans

Building or adding-on to your Washington home but don’t have the money for materials? You might be in the market for one of our Washington construction loans. We offer short-term (12 month building period) construction loans and construction-to-permanent loans. Short term construction loans have to be paid of in a year, or they can be turned into a standard 30 year mortgage. Our Washington construction-to-permanent loans combine the two. Typically, we allow you to borrow up to the appraised value of the future house. Fill out the form above with your information and a knowledgeable Washington representative will find a program that fits your needs.

- Building Rather Than Buying Your Washington Home?

Even if you’re building your home in Washington, you probably still need money to buy the materials. Our Washington construction loans are very flexible and can be tailored to your specific needs. They allow you up to 12 months to finish building your home. You can also withdraw the money as you need it to buy materials. One of our experienced Washington representatives will promptly provide you with more detailed information if you fill out and submit the above form.