“Debt-To-Income Ratio Facts”

To determine your maximum mortgage affordability, lenders use a calculation called debt-to-income ratio (DTI). This computation is made by dividing your monthly debt by your monthly income. To help you understand this ratio, here are three things that you should know:

The Difference Between Front End Ratio and Back End Ratio

There are two numbers that make up your debt-to-income ratio. First, there is the “front end” ratio, which is calculated by dividing your prospective mortgage debt by your gross monthly income. Then, there is your “back end” ratio, which is a total monthly debt ratio that factors in not only your new mortgage but also all of your other monthly debts that report to credit. The best case for lenders is generally a front end ratio of 28% with a back end ratio of about 36%. There are lenders, though, that will lend you money with a back end ratio up to 65%.

Does NOT Include Many Typical Household Expenses

Household expense, such as groceries, electricity, and fuel, are not reflected in your debt-to-income ratio. Only expenses that report to the credit bureaus are actually reflected in the lender’s calculation. Because of this, you need to do some calculations of your own to ensure that your new monthly bill will fit within your budget.

Some Debts May Be Taken Out

One thing to consider is that debts that you cosign for will be included in your debt ratio; however, some lenders will exclude these debts if you can provide a twelve month history of cancelled checks that document someone else as actually paying the debt monthly. Debts that have less than ten payments left can also sometimes be removed from your debt ratio.

The concepts outlined here explain how lenders will look at your income qualifications for mortgage loans. Ultimately, though, you must figure out for yourself what you can realistically afford. If you have any questions about what you have read here, or if you would like to discuss other facets of the mortgage process, please feel free to call us toll free 1-888-383-5363 or simply fill out the question box below. We will be glad to help you in any way we can.. There is never any obligation, and there are no fees associated with simply answering your questions.