During the home buying process, your lender will analyze your debt ratios, which are also known as your debt-to-income ratios, or DTI. Lenders calculate DTIs to ensure you have enough income to comfortably pay for a new mortgage and still be able to pay your other monthly obligations.
Your lender will
assess your debt-to-income ratio based on the following:
Housing Ratio or
“Front-End Ratio”
Besides your mortgage payment, your lender
will take into account other monthly costs associated with homeownership.
Additional costs of homeownership may include homeowner association (HOA) fees,
property taxes, mortgage insurance, and homeowner's insurance. Most of these
expenses are included in your monthly mortgage payment. You can determine your
housing ratio by dividing your anticipated mortgage payment and homeownership
expenses by the amount of your gross monthly income.
Debt Ratio or
"Back End Ratio"
A lender will also calculate your total debt
ratio in addition to calculating your housing ratio. At this point, your other
installment and revolving debts will be analyzed and added together.
Installment debts and revolving debts will appear on your credit report.
Monthly expenses such as credit card minimums, student loan payments, alimony,
child support, and car payments fall into this category. In addition to your
monthly mortgage payment and housing expenses, your lender will add up all your
monthly installment debts and revolving debts and divide that number by your
gross monthly income.
Debt-to-Income Limits
It's best to keep your front-end and back-end
debt ratios at 28 percent and 36 percent, respectively. It’s still possible to
get a mortgage with higher DTIs.
- Currently, FHA limits have a
31/43 ratio, but they can be higher in some cases.
- A Conventional loan typically
has a 28/36 ratio. However, in some circumstances, the back-end DTI could
go up to 50%.
- VA limits are only calculated with one
DTI of 41.
- USDA limits have a 29/41 ratio.
You may be able to qualify with a much higher
back-end ratio if you are approved for a non-conforming loan. Non-conforming
loans do not meet the purchase guidelines set by Fannie Mae and Freddie Mac.
Typically, these guidelines revolve around credit scores, loan-to-value ratios
(LTV) and debt-to-income ratios (DTI). Non-conforming loans are typically
considered riskier, so the borrower often pays a higher interest rate than they
would on a conforming loan.
Speak with a licensed loan officer to estimate
your debt-to-income ratio. To learn more on how your debts and debt-to-income
ratios can affect how much house you can afford, contact our team today!