Do you know what are Debt-to-Income Ratios?

Debt-to-income ratios are referred to as the guidelines that are used by mortgage lenders in order to determine your maximum mortgage amount. This is just a percentage of your monthly gross income (before taxes) that is used by you for paying your monthly debts.

Due to the reason that there are two calculations, so there is a “front” ratio and a “back” ratio. These two ratios are generally written in the following format: 33/38.

DebttoIncome

Front ratio

The front ratio is known as the percentage of your monthly gross income (before taxes) that is consumed in paying your housing costs. This housing cost includes principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable).

Back ratio

The back ratio is also same as the front ratio, just that it also includes your monthly consumer debt.

Car payments, credit card debt, installment loans, and similar related expenses can be included in consumer debt. Auto or life insurance is not considered as a debt.

Common guideline for debt-to-income ratios

33/38 is considered as a common guideline for debt-to-income ratios. Thirty-three percent of a borrower’s monthly income is consumed in housing costs.

housing-cost

When we add their monthly consumer debt to the housing costs, then it should not exceed from thirty-eight percent of their monthly income to meet those obligations.

Guidelines for debt-to-income ratios are always flexible

The guidelines are only guidelines don’t consider them rules, so they are flexible. If in case a small down payment is made by you, then the guidelines are more rigid. If in case you are having marginal credit, then the guidelines are more rigid. On the contrary, if you have made a larger down payment or you are having sterling credit, then the guidelines are less rigid.

Variation in Guidelines according to Loan Programs

There are also variations in guidelines according to loan program. According to FHA guidelines a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but for the back ratio the guideline is 41.

Example

If your income is $5000 a month, with 33/38 qualifying ratio guidelines, almost $1650 should be your maximum monthly housing cost. And that figure should increase up to $1900 when your consumer debt, your monthly housing and credit expenditures are included in housing cost.

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