How to look at the debt-to-income ratio

Break your debt-to-income ratio

Never heard of debt-to-income ratio?

Or maybe you've heard of it, but you do not know how it affects you?

Your debt-to-income ratio calculations, can make or break your ability to get a mortgage. Since the lender does not have a crystal ball to predict this ratio, you can handle your monthly payments.

So, how do you know you what?

- Start your total monthly income - or rather, all the money you before things start to play a role, such as taxes and health insurance deduction. In order to make our math easy, let's say you a total of $ 5,000 per month.

- And then add all your monthly liabilities - or all of your debt is responsible for payment every month, like your cars, your child support payments, your student loan payments, and so on. Similarly, our math, so simple, all equal to $ 1,000.

- Your total monthly income, liabilities, and you will get your debt to income ratio.

In our example, the ratio is 20%. This means that 20% of the revenue is used to pay the debt.

Ready?

The goal of your debt to income ratio is kept as low as possible. After all, you have to spend to pay off the debt, the more income you can achieve and all other costs, to have their own house mortgage payment!

But we're not done!

The lender break this calculation further - to the front-end and back-end ratio.

Increase in your front-end than you as a homeowner monthly (such as your mortgage to pay housing costs, homeowners 'insurance, property taxes, homeowners' association fees, and any other you are responsible for). Then, this figure is your total monthly income.

So, if all of these fees is $ 2,000, your total monthly income is $ 5,000, the front of the proportion will reach 40%.

Now, lenders are looking for the front of the proportion is 28% or less. Therefore, in order to qualify, you have to find a cheap house!

Your back-end than all housing expenses, increase in other liabilities - your total monthly income, and then the total. In our example, your housing costs and liabilities of up to $ 3,000. When you divide $ 5,000, you will get a back-end ratio of 60%.

Now, lenders are looking for back-end ratio is 36% or less. So, you've got some major cutting down to do!

However, lenders do not adhere to these restrictions all the time. They will consider taking other things - like a health savings account. If you have enough savings equal to a few mortgage payments, they may be willing to approve your application, even if your ratio is not low, but it should be.

So, how high the lender is willing to go?

It depends on the exact borrower, your situation, but in some cases, lenders are willing to rise to 45% or even 50%.

If you are applying for FHA loans (also known as an "FHA Loan"), calculated the same way. However, the requirement to have a little bit different. Most lenders are looking for the front of the proportion of 31% and back-end ratio of 43%.

Like a traditional loan, there is a certain amount of leeway, too. In fact, the FHA loan approval even with the back-end ratio up to 57%!

If you think you have enough space to "swing" Just remember - these calculations do not take into account all other financial obligations. For example, utilities, groceries and gas things, such as will take a chunk of your gross monthly income, too.

Bottom line - just because you can get approved, does not necessarily mean that you should move forward. You need to make sure you can afford everything you have. After all, the last thing you want is added to since 2008, the United States 38,000 foreclosures!