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Debt-to-Income ratio is a tool that lenders use to qualify buyers for a
mortgage and is an important factor in determining loan approval. It
provides an indication of the amount of debt that a potential borrower is
obligated to in relation
to how much income they have. Total monthly debts are
determined by adding the normal and recurring monthly debt payments such as
monthly housing costs, car payments, minimum credit card payments, personal
loan payments, student loans, child support, alimony, and other things. By dividing the monthly
income into the monthly debt, you arrive at a percentage of the monthly
income. Lenders actually look at two different ratios commonly called
the front-end and the back-end. The front-end ratio is
the proposed total house payment including principal, interest, taxes,
insurance, mortgage insurance if required, and homeowner association
fees. Lenders generally don't want these expenses to be more than 28%
of the monthly gross income. The back-end ratio
includes the same items that are in the front-end ratio plus any other
monthly obligations like the ones mentioned earlier. Lenders prefer to
see this ratio not to exceed 36% of monthly gross income but some lenders may
extend that to 43%. Borrowers obtaining an FHA mortgage might also be
allowed an even higher back-end ratio. If a borrower had
$8,000 monthly gross income, their proposed house payment should not exceed
$2,240 or 28% of their monthly gross income. Then, their house payment
and monthly debt should ideally not exceed $2,880 or 36% of their monthly
gross income. For the sake of an
example, let's say that their monthly debt was $900. That would only
leave $1,980 for the maximum house payment. The monthly debt became a
limiting factor affecting the house payment. In addition to
determining whether the buyer qualifies for the mortgage, it could affect the
interest rate. Having good credit and having the proper ratios can
result in being approved for a mortgage. On the other hand, if the debt
is on the upper side of an acceptable range, the lender may charge a higher
interest rate for the addition risk of a marginal borrower. While the math is not
difficult to come up with your ratios, it is not necessarily a do-it-yourself
project. A trusted lending professional can assess your situation and
give you an accurate picture of what price home you can afford and the rate
you can expect to pay. Both things are
important to know before you start looking at homes and especially before you
contract for one. All lenders are not the same. Call me to get a
recommendation of a trusted mortgage professional who specializes in the type
of mortgage you want. Download this FREE Buyers Guide. |
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