When you are in the middle of the mortgage application process you may hear the terms DTI or ‘front end ratio’ and ‘back end ratio’ being thrown around.
Your income plus monthly debt burden will help determine how much house you can afford. The front end ratio and the back end ratio are the calculations that make this determination.
The Front End Ratio:
Front Ratio is determined by adding together your proposed principle and interest mortgage payment, taxes, insurance and any dues owed to a homeowners association or condominium complex. This total is divided by your total gross income.
Example:
- Principle and interest mortgage payment = $1,000
- Taxes and insurance = $150
- Homeowners Dues = $50
- Total Payment = $1,200
With an income of $4,000 a month your front end ratio would be 30%. Typically mortgage companies want to see a front ratio of under 28%.
[Related: What is YSP (Yield Spread Premium)?]
Back End Ratio:
This ratio is called your DTI (Debt to Income).
The back ratio is determined by adding together the total mortgage payment (including everything listed above) plus any other monthly financial obligation. The monthly obligations can be credit card payments, auto loans, lines of credit, etc. This total is then divided by your gross monthly income. If you have no monthly payments besides your mortgage your front and back end ratios will be the same.
Example:
- Total from above = $1,200
- Car Payment = $200
- Credit Card Payments = $80
Again with a $4,000 a month income your back end ratio would be 37%. Mortgage companies want to see this below 36%.
Even though lenders like to see your DTI below 36% some lenders will give exceptions all the way up to 50% depending on the strength of your credit score and other factors in your loan.
Keeping a low Debt to Income ratio is important and can help you qualify for a mortgage with less hassle.
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