There are two ratios that most lenders use to determine your ability to repay a loan. One is referred to as your "back-end". This ratio is basically your total debt to income ratio. The second ratio is referred to as your "front-end". Usually, this ratio is considered your housing expenses to income ratio.The ratio of the your total monthly obligations, which includes housing expenses and recurring bills, in relation to your monthly income. Lender use this to decide your ability to repay the mortgage and all other debts. Your DTI ratio is an important factor in deciding the loan amount you can qualify for. It shows your qualifying ratio, or your financial capacity to pay the mortgage, in addition to your other bills.
Factoring your debt to Income Ratio is one of the basics involved in determining a borrower's risk profile for a mortgage loan. Borrower's who have a low debt to income ratio will have much greater discretionary income and pose a lower lending risk. Borrowers with a high debt to income ratio will be considered a higher risk.
Not too long ago in the mortgage industry, the Debt-to-Income ratios are expressed in two sets of two digit figures, such as 28/36, in which 28 represents a "front end" ratio of 28% of total income and 36 means a "back end" ratio of 36% of income. Nowadays, banks are more concerned about the "back end" ratio and all but disregard the "front end" ratio. Most have also raise the "back end" ratio to over 40%. In other words, mortgage banks are now allowing borrowers to use 40% or more of their monthly income to qualify for home financing, provided they have no other debts.
Debt to Income Ratio is usually all your total payments divided by your total monthly income. Lenders usually allow exceptions to this by not counting certain accounts such as deferred student loans, accounts with less than 10 monthly payments remaining and accounts the applicant can prove are paid by someone else.
Gross income is used in determining your Debt-to-Income ratios. Gross income is the monies you have earned before you pay taxes, this number is usually substantially higher than the money you deposit in your bank account every week.
Sometimes a lender will determine that your debt-to-income ratio is too high for you to qualify for a mortgage. Often, you can still qualify if some debts are paid off prior to or at closing.
If you have student loan payments that are deferred, ask your preferred Mortgage Professional about having this payment excluded from your debt to income ration.
Do not be afraid to apply if your debt ratio exceeds that standard quotas as electronic underwriting has approved debt ratios in the 60 to 70 percent range and equity in the property, excellent credit history and/or sufficient assets all help in getting this through.
The debt to income ratio is a control the lender uses to offset and measure risk. The higher the DTI the higher the risk. The higher the risk the higher the rate, or the lower the LTV.
Include all of your documentable income sources on your loan application. Be sure to include sources such as child support, social security and similar types. They all can be figured into the final DTI and may greatly affect your final interest rate.
Most lenders now days will mainly be concerned with your back end ratio. 41% or below will fall into the conforming lending guidelines. Subprime lenders may even go up to 55% ratio. You will need a mortgage professional to pull credit and look at your income to calculate the ratio for you.
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