How to Figure Out My Debt Ratio for a Home Loan
Mortgage lenders base their decision on whether or not to issue mortgages and what interest rate to charge on a number of factors that affect your creditworthiness. One factor: your debt ratios (the front-end ratio and the back-end ratio). For conventional mortgages, lenders prefer that you have less than a 28 percent front-end ratio, and less than 36 percent for the back-end ratio. For FHA mortgages, lenders are more flexible, with a 29 percent limit for the front-end ratio and a 41 percent limit for the back-end ratio.
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Instructions
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1
Determine your total monthly income (lenders use your pretax income). If you have an annual salary instead of a monthly salary, divide it by 12 to get your monthly income. For example, if your annual income is $60,000, your monthly income would be $5,000.
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2
Determine the monthly cost of your mortgage expenses. Lenders include your mortgage payment, real estate taxes and homeowner's insurance as mortgage expenses.
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3
Divide your monthly mortgage expenses from Step 2 by your gross monthly income from Step 1 to calculate your front-end ratio. For example, if your monthly mortgage expenses were $1,200 and your monthly income was $5,000, your front-end ratio would be 24 percent.
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4
Determine the cost of all of your other monthly debt expenses, including student loans, auto loans, and child support or alimony.
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5
Add the monthly debt expenses from Step 4 to the monthly mortgage expenses from Step 2. For example, if your monthly mortgage expenses were $1,200 and your other monthly debt expenses were $300, the total would be $1,500.
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6
Divide the total monthly debt expenses from Step 5 by the gross income from Step 1 to determine your back-end ratio. For example, if your total debt payments were $1,500 and your gross income was $5,000, your back-end ratio would be 30 percent.
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Tips & Warnings
You don't have to include monthly debt payments that will cease within nine months. For example, if you'll pay off your car loan in six months, you should not include it as a monthly debt payment in Step 4.
