Understand Debt to Income Ratios when getting a mortgage

Mortgage Debt to Income Ratios:

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 are two ratios, referred to as the front ratio and the back ratio.

The front ratio is based upon your gross income compared to your total housing payment. The back ratio is based upon your gross income compared to the total housing payment and all of your debts.

Debt limit

There is generally a debt limit associated with each type of loan, such as a 28/38 qualifying ratio for an FHA. These qualifying ratios are guidelines. An excellent credit history or proof of more assets can help you qualify for a mortgage loan even if your debt load is over and above the limit. I have seen many loans with a total debt ratio of 49.99% get approved.

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. There are always exceptions to standard debt ratios. We will know when we run your file on line through our automated underwriting engine.

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.

For example:

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

Simply guidelines

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.

I will run your loan through an automated underwriting engine through either Fannie Mae, Freddie mar or FHA. I have seen loans with debt ratios as high as 60% get approved although nowadays lenders are putting "overlays" on the feedback so generally lower debt ratios are preferred.