Most people never think about their debt to income ratio but it is a major factor in qualifying for a mortgage. It is calculated with a simple math equation;
This ratio is one-way lenders measure the ability of a borrower to manage the payments they make monthly and if the borrower will be able to repay the money borrowed. There are actually two ratios referred to by industry insiders as;
The Front-End ratio refers to just the proposed new housing costs excluding all other debts. An example of this would be;
New home Mortgage and interest payment ($1,170) / Mouthy Income $4,500 = 26%
While the acceptable ratios have changed over the years the old standard of, 28 percent or less of the borrower’s gross monthly income is a good starting point.
That back end ratios example is as follows;
All debt payments ($1,710) / Mouthy Income $4,500 = 38%
Acceptable back-end ratios historically have always been 38%. Recently Fannie Mae has made an announcement that in some situations the acceptable back-end ratio could now be as high as 50%.
Evidence from studies of mortgage loans suggests that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.
As always there are many factors that go into a mortgage approval. The best thing to do is call your local Mortgage 1 Loan Officer and they will be happy to help you.
What is the Debt-to-income ratio?