813.910.8020 Apply Now

Mortgage Broker Tampa, FL | Mortgage Lender Tampa Florida | Marimark Mortgage

  • Home
  • Homebuyers
  • Homeowners
  • Realtors
  • Investors
  • About Marimark
  • Contact Us
  • Mortgages
  • Apply Now
  • Current Mortgage Rates
  • Calculators
  • Testimonials
  • Blog
  • Videos
  • Featured In
Home / Blog / Qualify For Home Loan / What is your debt-to-income ratio, and why is it important in qualifying for a mortgage?

What is your debt-to-income ratio, and why is it important in qualifying for a mortgage?

June 4, 2014 By Mary Catchur

Qualify for a home mortgage: Debt-to-income ratio.
Qualify for a home mortgage: Debt-to-income ratio.

The debt-to-income ratio is one of the main criteria lenders use to determine whether you are qualified for a mortgage loan. It is a good indicator of your ability to repay the loan in the future.

There are two ratios that the lender considers. One takes into account only the expenses related to housing and is called the front-end ratio. The other considers all monthly obligations and is called the back-end ratio. The back-end ratio is the more important of the two ratios to the lender.

Front-End Ratio

The front-end ratio is calculated by dividing the total of the mortgage payment (principal and interest) plus homeowners insurance, taxes, homeowner’s association fees (if any) and mortgage insurance (if applicable) by the borrower’s monthly gross income. Lenders like to see this ratio at 28% or less on a conventional loan and 31% or less on an FHA loan, but exceptions may be made for higher ratios.

Back-End Ratio

The back-end ratio is calculated by dividing the housing expenses included in the front-end ratio PLUS all other monthly obligations that are ongoing such as car payments, student loan payments, credit card minimum monthly payments and any other contractual obligations that typically appear on the borrower’s credit report by the borrower’s gross monthly income. Lenders typically like to see a back-end ratio of 36% or less on a conventional loan and 43% on an FHA loan, but exceptions are often made for higher ratios when there are compensating factors.

Another item included in the back-end ratio would be any expenses associated with owning other properties, such as the mortgage, taxes and insurance on that property – whether it is a second home or investment property. If the property is rented, the lender may allow you to offset those expenses with rental income from the property as long as there is a history of it being rented and the rental income is reported on your most recent tax return. In some cases, if the property was purchased subsequent to the most recent tax return, the lender may allow rental income from an existing lease, but this is handled on a case by case basis.

Front-End and Back-End Ratio Calculation

Following is an example of a front-end and back-end calculation.  Borrower Bob makes $60,000 in base salary annually ($5000 monthly).  His home purchase is expected to have monthly principal, interest, taxes, insurance and HOA fees of $1400.  In addition he has a car payment of $350 monthly, student loans of $100 monthly and minimum credit card payments of $200 monthly.  His ratios would be:

  • Front-end: $1400/$5000 = 28% (Housing expenses only divided by gross income)
  • Back-end:  $1400 + $350 + $100 + $200 or $2050/$5000 = 41% (all expenses divided by gross income)

While Bob’s back-end ratio exceeds the standard allowable ratio of 36%, in practice this loan would most likely be acceptable to the lender as they consider compensating factors, such as cash reserves, stable employment, strong credit score, etc.

Questions to Borrowers

Although these ratios may be acceptable for underwriting the loan, I always encourage the borrower to consider a few things when reviewing this ratio. Let’s look again at the components of the back-end ratio.

#1 Do you notice any monthly expenses that are missing? Water, electricity, cell phone, dining out, car insurance? Although most borrower’s spend money on these amounts each month, they are typically not considered as part of the debt-to-income ratio (unless they are paid for by credit card and included in monthly minimum payments or part of an HOA fee). Now look at income. This amount is GROSS monthly income, not what you bring home each month in your paycheck. So what does this mean? It means that these ratios really do not reflect how much of your monthly available CASH you will be spending each month. Expenses may be understated as they don’t include other everyday cash outflows, and income doesn’t reflect actual cash available to you after taxes. So, it may be wise to consider purchasing a home that does not require you to spend up to the upper limits on the debt-to-income ratio, even if it meets underwriting guidelines. It is important that you consider your lifestyle and prepare a budget that reflects your complete monthly outlays of cash in relation to the cash coming in to make sure there is not a shortfall. The debt-to-income ratio is not intended to be a budget.

#2 Another thing I ask borrowers is to consider is how much they are currently paying on their monthly housing expenses. I often see borrowers who are spending $800-1000 monthly in rent but are buying a house that will require payment of $1400 -$1600 in mortgage payments, but they have little in savings. This tells me they are not living on a budget that allows for an extra $600 in payments each month. Before buying a home, I recommend that borrowers set aside the difference between what they are currently paying and what they are expecting to pay going forward. At a minimum, this will help build up some additional savings for closing costs and down payment, but more importantly it allows them to see if they are going to be comfortable with the new payment amount.

Opt In Image
Stay Informed, It's Your Money
Marimark Mortgage Newsletter

The Marimark Mortgage Newsletter will keep you informed with important events in the mortgage industry that could impact your finances.

We especially focus on ways to save money on your current and future mortgages. And, we continually share the information we share with our clients, because we believe informed consumers are the best consumers.

Real estate agents, and other professionals in the industry, will receive an ongoing wealth of information that will help them serve their clients.

Thank you for signing up!

Filed Under: Qualify For Home Loan Tagged With: Debt to Income Ratio, Qualify for a Mortgage

Opinions, estimates, forecasts and other views contained in this page do not necessarily represent the views of Marimark Mortgage or its management and should not be construed as an offer to provide financing at the rates or terms mentioned. Due to market fluctuations, interest rates are subject to change at any time and without notice. Interest rates are also subject to credit and property approval. Although Marimark Mortgage attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. Information from this page may be used with proper attribution.

Save with a Mortgage from Marimark

Whether you are buying a home or refinancing, you can save with a mortgage from Marimark Mortgage!

    Search

    Post Categories

    Testimonials

    Refinancing with Mary an absolute pleasure

     
    Refinancing with Mary has been an absolute pleasure. I have never been through the process before and she took the time to explain each step. She was prompt (had a rate locked in right away) and most importantly always answered the phone or emails almost immediately! The communication line alone made the refinancing process every bit worth it. Would recommend to anyone, and will be back for any future purchases! Bret Brennan, March 2021
    See More Reviews
    Marimark Mortgage LLC
    5327 Primrose Lake Circle
    Tampa, FL 33647-1328
    (813) 910-8020
    (866) 910-8020

    Accessibility
    Privacy Policy
    Terms of Service
    Sitemap

    Reviews

    Website Testimonials
    Google Reviews
    Zillow Reviews
    Trulia Reviews
    Facebook Reviews
    Yelp Reviews
    BBB A+ Rating

    FOLLOW US

    • ‎
    • ‎
    • ‎
    • ‎
    • ‎
    • ‎
    Marimark Mortgage is a BBB A+ Accredited Business

    Recent Posts

    • FHA Announced a 30-Basis Point Reduction to Annual Mortgage Insurance Premiums
    • How Can You Improve Your Credit Score?
    • Historical Mortgage Rates From The 1970s
    • What You Need to Know About Mortgage Forbearance
    • Top Tips to Save Money for a Down Payment

    © 2023 Marimark Mortgage, LLC All Rights Reserved. | Internet Marketing by Image Building Media. | RSS Feed

    Reviews / Recommendations: Google, Zillow, Trulia, LinkedIn, Facebook, Yelp, BBB

    Licensed in Florida by the Office of Financial Regulation, Mortgage Lender License #MLD77.
    Licensed in Virginia by the Virginia State Corporation Commission, License MC#4556.
    Licensed in Pennsylvania by the Department of Banking and Securities, License #40222.
    NMLS#248318 – www.nmlsconsumeraccess.org.