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such necessities of living. All of your expenses need to be considered when determining a comfortable debt-to-income ratio.
A family with a large mortgage payment may only be able to afford debt totaling 10% of the household monthly income. Similarly, a family with a small mortgage payment or no mortgage would be more comfortable with a 20% ratio.
How a Lender Uses Your Debt-to-income Ratio
When you apply for a loan, lenders actually take two ratios into consideration—the front-end ratio and the back-end ratio.
The front-end ratio is the percentage of your monthly gross income that is spent on your total mortgage (including principal, interest, taxes, insurance) or rent. Most lenders don’t want your mortgage pay- ment to exceed 28% of your monthly gross income. If you want to calculate how big a mortgage payment a lender might be willing to allow, multiply your monthly gross income by 0.28. For example: $4000 x 0.28 = $1120. This would be the total monthly mortgage payment most lenders would be willing to allow you.
The back-end ratio is the debt-to-income ratio we calculated above, which accounts for your monthly debt payments excluding the mortgage or rent payment. In general, this ratio should never exceed 36%, and many lenders prefer that it doesn’t exceed 20%.
Allowable ratios sometimes depend on the type of loan you are applying for. Conventional loans demand a front-end ratio that doesn’t exceed 28% and a back-end ratio that doesn’t exceed 36%. FHA loans require a front-end ratio of 29% and a back-end ratio not exceeding 41%.
The following chart gives you an idea of what your ratios should be if you are thinking of applying for a mortgage loan. Your FFEF counselor can give you additional advice on these ratios.
Taking Your Finances Beyond Your Home 23