It is important to note that many lenders look at what is referred to as front and back end ratios. The front-end ratio is the housing payment vs. gross income and the back-end ratio is the total monthly (excluding utilities, food, or other non-recurring/variable expenses) vs. gross income. Some lenders will go as high as 55% on the back-end ratio depending upon certain factors such as the borrower's credit score & loan amount.
Front ratio is calculated by dividing your gross monthly income by your housing expenses - those include principal, interest, real estate taxes, homeowners insurance, mortgage insurance (PMI) and association fees - the latter two you may or may not have and if you have condominium association, insurance is often included in association fee.
When calculating back ratio your monthly consumer debt payments are also included like payments for your cars, credit cards, installment loans including student ones, second mortgage, etc.
Lower debt to income ratios allow you to get the best rates and quicker loan approvals.
Conforming loans will require lower DTIs than will your subprime loans. Once your mortgage professional knows what your income is and has as chance to pull your credit he or she will be able to determine what category of loans you will qaulify for. This is done is the first stage of the loan process called the pre-qualification.
Your debt to income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other continuing obligations are met. The ratio is one of the many things a lender considers before approving your home loan.
As one of the underwriting criteria, Debt-to-Income ratio carries much weight in the loan approval process. For homeowners with occupations that are difficult to document income, many lenders offer loan programs in which DTI ratios are not considered in the underwriting process.
Debt ratios tell the lender whether or not you will be able to afford the proposed payment. The lender looks at the total gross income before taxes and other deductions and uses this number in the factor to determine the income you qualify with.
The lower your income to debt, the more secure the lender feels.
Your debt to income ratio (DTI) is a key indicator of your true financial picture. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food, entertainment) by monthly gross income. For example, personal gross monthly income of $3,000 who is making minimum payments of $1000 on debt (loans and credit cards) has a debt to income ratio of 33 percent ($1000 / $3000 = .33). Contact A Mortgage Professional to help you determine your DTI.
Debt-to-income ratio - A comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
As far as underwriters are concerned, the Back DTI (total monthly obligations divided by total monthly income) carries more weight than the Front DTI (monthly housing expenses divided by total monthly income). In fact, some lender banks have disregarded the Front Debt-to-Income ratio altogether and look only at the Back DTI.
Although many lenders have programs that allow up to a 55% debt to income ratios, it is not always in the best route to take. The borrower should consider what his or her potential for an increase or decrease in income could be over several years. Discussing your short and long term goals with your mortgage broker will allow them to find a loan program that is in your best interest.
Debt to Income Ratio
Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.
There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit.
Understanding the qualifying ratio
Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.
With a 28/36 qualifying ratio:
Gross monthly income of $3,500 x .28 = $980 can be applied to housing
Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 qualifying ratio:
Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
Remember these are just guidelines. We’d be happy to pre-qualify you to determine how large a mortgage loan you can afford. We look forward to helping you buy your dream home.
This ratio, also known as "DTI", is very important in the eyes of each Lender. Some lenders will allow your DTI to be as high as 55% making it even easier to qualify for a mortgage.
Other lenders will want to see your DTI at 40% or below and usually conforming loans will have this stipulation. Many niche programs do allow for higher DTI ratios. If you are currently looking for a loan you might want to cosider consulting a mortgage broker to find out what percentage your DTI is and what programs are available.