Debt-to-Income Ratios

To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios.  This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts.  Because there are two calculations, there is a "front" ratio and a "back" ratio and they are generally written in the following format:  33/38.

The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable).  The back ratio is the same thing, only it also includes your monthly consumer debt.  Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses.  Auto or life insurance is not considered a debt.

A common guideline for debt-to-income ratios is 33/38.  A borrower's housing costs consume thirty-three percent of their monthly income.  Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations.

The guidelines are just guidelines and they are flexible.  If you make a small down payment, the guidelines are more rigid.  If you have marginal credit, the guidelines are more rigid.  If you make a larger down payment or have sterling credit, the guidelines are less rigid.  The guidelines also vary according to loan program.  FHA guidelines state that a 29/41 qualifying ratio is acceptable.  VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.

Example: If you make $5000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around $1650.  Including your consumer debt, your monthly housing and credit expenditures should be around $1900 as a maximum.

copyright 2006 by Terry Light and RealEstate ABC