Canyon Country Homes

Lenders use guidelines to work out the maximum mortgage amount that you can borrow and these guidelines are known as debt to income ratio. This is just the portion of your gross monthly income (before taxes) that you spend towards your monthly financial obligations. Since there are two calculations, there is one front ratio and a back ratio. They are usually expressed as 33/38.

The front ratio is the portion of your gross monthly income (before taxes) that you use to make your housing payments including interest, principal, insurance, taxes, homeowners association fees (if applicable) and mortgage insurance (if applicable).

The back ratio is something similar but the only difference is that it includes your consumer debts. Consumer debt can include your credit card debt, car payments, installment loans and other similar expenses. Life or auto insurance premium is not regarded as debt.

A familiar rule of thumb for debt-to-income ratios is 33/38. Your housing payments shouldn't exceed 33% of your gross monthly income. Sum up your consumer debts with the housing payments and the figure shouldn't exceed 38% of your gross monthly income.

The rules of thumb are just principles and they're flexible. When you make a nominal down payment, the rules become stricter. If you have poor credit, the rules are more stringent. On the other hand, if you make a hefty down payment or have excellent credit, the rules become more flexible. The rules also differ according to the home loan program. The FHA guidelines mention that a 29/41 eligibility ratio is satisfactory. Veterans Administration (VA) guidelines don't have any front ratio in any way but the rule of thumb for the back ratio is 41.

An example would help you understand better. If you're earning $5,000 each month, under 33/38 eligibility criteria, your maximum monthly housing expenses should be approximately $1,650. If you include your consumer debt obligations, your monthly housing and consumer debt expenses should be approximately $1,900 as a maximum.

Lenders use your debt-to-income ratio to assess your repayment capacity and determine how much mortgage you can afford to borrow. Therefore, you should try to maintain this ratio at a low level.