Determining how much home you can afford, with Debt to Income Ratios

Lenders determine maximum mortgage amounts using guidelines titled debt-to-income ratios. They calculate it by using a percentage of your monthly gross income, before taxes, that is used to pay monthly debts. There are two calculations, a “front” and “back” ratio, written for example in the following format: 33/38.

The front ratio is the percentage of monthly gross income used to pay housing costs, including principal, interest, taxes, insurance, as well as mortgage insurance and home-owners association fees if applicable. The back ratio is the same, but only includes monthly consumer debt, such as car payments, credit cards, loans, and other expenses.

These are just guidelines, are flexible and change. Typically the smaller the down payment the more rigid the guidelines are. As well, those with marginal credit the guidelines can be more rigid. Making a larger down payment or having great credit, the guidelines are more flexible. These standards all vary according to the loan program, whether FHA, VA, or Conventional.



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