Home Loan and Your Debt-to-Income Ratio

Home Loan in TempeA good credit score is not the only thing lenders consider when approving a mortgage application. While this helps, it is important to know that debt-to-income (DTI) ratio is as important as a strong credit history. DTI refers to the comparison of your home expenses and debt obligations over your income. This plays a big role, as it can affect whether or not you’ll get a mortgage.

Front-End and Back-End Ratio

Lenders, for the most part, look at your front-end ratio and back-end ratio when applying for a loan. The former is also known as housing ratio, which shows that percentage of what you’re earning would go to housing expenses, monthly loan payment, taxes, and associated fees. The latter, according to mortgage companies in Tempe, shows the portion of your income required to cover all your debt obligations.

You can calculate your front-end ratio by adding your home expenses and dividing it by your gross monthly income. Multiply the result you’ll get by 100. For your back-end ratio, add your monthly debt payments with housing expenses and divide the result by your monthly gross income.

Take Note of the Limit

Experts note that the ideal front-end ratio should not exceed 28%, while the back-end ratio (including all expenses), should be 36% or lower. There are cases, however, that lenders accept higher ratios, which will depend on your savings, credit score, and down payment. The limit may also vary on the loan type.

Some lenders require DTI not more than 45%, but there are also those who accept as high as 50%. This may happen if there are other compensating factors like a savings account with a value equivalent to housing expenses of six months. A DTI over 50 would need other substantial compensating factors.

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The best way to lower your DTI is to pay some of your debts. Some postpone the application, while others get a co-signer. Experts suggest, however, that a co-signer is not always the answer. If your DTI is high, it is best to fix your finances first before continuing with the mortgage application.