Mortgage debt to Income

Debt-to-Income ratio is what lenders use to qualify buyers for a mortgage and  loan approval.  It gives an indication  of debt that a  borrower is obligated to versus their income.

Monthly debts are determined by adding the   recurring  debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan, student loan(s), child support, alimony as well as other items.

When you divide the monthly income into the monthly debt, you arrive at a percentage of the monthly income.  Lenders  look at two different ratios, the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, PMI & HOA fees.  Lenders 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 including other monthly obligations like the ones mentioned.  Lenders want to see this not to exceed 36% to 43% of your monthly gross income.  Borrowers obtaining an FHA mortgage might also be allowed an even higher  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.

While determining whether the buyer qualifies for the mortgage, it could affect the interest rate.  Having good credit and  ratios can result in being approved for a mortgage. If the debt is on the upper side of an acceptable range, the lender might charge a higher  rate for the addition risk. A lending professional can assess your situation and give you a solid forecast of what price home you can afford and the rate you'll pay.

These are important to know before you start looking at homes so your ready to make an offer.  All lenders are not the same.  Call me to get a recommendation of a mortgage professional, keep  in mind that a bank & a mortgage broker have different resources, ask me and I'll explain.