What is Debt to Income Ratio?

What is Debt to Income Ratio?

In the mortgage industry there are a lot of big words and terminologies being thrown around and while those that are familiar with the industry understand completely, most of the general public is left scratching their heads. So what is this term “debt to income ratio”?

When you apply for a mortgage your lender will analyze all of your debt and figure out how much income you have coming into the household versus how much debt is going out every month. Lenders will calculate the debt to income ratio to make sure that you have enough income to comfortably pay a new mortgage payment.What is Debt to Income Ratio?

There is two distinct debt to income ratios that your lender will analyze:

“Front end ratio”. This is also sometimes referred to as “housing ratio”, which will be your monthly mortgage payment plus any other monthly cost to homeownership. These could include homeowner association fees, mortgage insurance, homeowners hazards insurance and property taxes. These are some of the normal expenses that could be included in your monthly mortgage payment. Your lender will divide the projected mortgage payment and home ownership costs by the amount of gross monthly income to determine your front and ratio.

Then there is the total debt ratio or “back end ratio”. This is all the other debt that you have on a monthly basis such as revolving debts from a credit card, student loan payments, child support, alimony, car payments or any other type of debt. The lender will include all of these in a monthly installment to add to your estimated monthly mortgage payment to determine what your debt to income ratio will be.

For instance: if your household grosses $5000 a month and you are projected monthly mortgage payment with all the additional expenses will be $1500 a month plus any other debts, which let’s say could add up to $500 extra, that means that you have $2000 a month in debt going out with a $5000 a month income. This means your debt to income ratio is at 40%.

Now, most debt to income limits for the majority of loan options out there like it to be at least 36% or lower. Even better if it’s at 28% or lower. The FHA limits are currently 31 to 43% depending on the lender and the limits are calculated up to 41%. USDA home loans are limited between 29% and 41% based on the type of loan, credit history and score.

To determine your debt to income ratio simply take your total that figure and divided by your income.
For more information on debt to income or to speak with me about possible loans, debt to income ratio limits and the right program for you call me at any time.

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