Understanding Debt to Income Ratio

Good evening beautiful Women Supporting Women,

Happy Blessed New Year and decade to you all.  I hope you had a wonderful holiday season and are off to a great start to the new year.  I would like to send a special thank you to the ladies who shared their goals with me offline.  It is definitely appreciated and I love the interaction!

The week before, we left off reviewing the national and NY state programs available to first time home buyers.  Today we will focus on the debt to income ratio and how mortgage companies come to the conclusion of approving you or not.

What is debt to income ratio?

This is your monthly debt compared to your gross monthly income.  In other words, it’s the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow.  When the mortgage companies look at the ratio, it needs to be 36% or lower.

There are 2 types of ratios that the mortgage companies look at before making a decision to give someone a loan.  We have front-end and back-end ratios.

Front-end ratio 

Front end ratio is also referred to as a household ratio. The front-end debt to income ratio is the dollar amount of your home-related expenses — your future monthly mortgage payment, property taxes, insurance and homeowners association fees — divided by your monthly gross income.

Back-end ratio

Back-end debt to income ratio includes all the other debts you pay each month — such as credit cards, student loans, personal loans and car loans — in addition to home-related expenses. Back-end ratios tend to be slightly higher, since they take into account all of your monthly debt obligations.

While both of these ratios matter, the one that holds the most weight is the back end ratio since it takes into account all of your debt.  Just remember, having a low debt to income ratio will help you have a better credit score, which helps you receive a lower mortgage rate.

If your debt-to-income ratio is exceptionally high — around 50% or more — you probably should wait to make a home purchase.

There are debt to income ratio calculators on line to help you see where you stand.  Here are a few:

Next Up: Private Mortgage Insurance (PMI) and how paying per month can reduce PMI sooner 
If you have any questions or comments, please feel free to post here of email me at: thefinancialcomforter.com
As always, thank you for reading.
Have a beautiful and blessed week.
Marsha
Changing the lives in our community….one family at a time

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