Do Mortgage Companies Look at Debt-to-Credit Ratios?
The debt-to-credit ratio refers specifically to how much of your available credit lines you are using. Mortgage companies also look at related ratios that compare the debt you will take on with the mortgage, as well as other existing debts you have when you take out the mortgage, to your income.
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Credit Score
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Mortgage companies want to know your credit score because it summarizes how likely you are to default on your mortgage. Your credit score includes looking at your debt-to-credit ratio on your credit lines. According to the Fair Isaac Corporation, about 30 percent of your credit score comes from your existing debt, which includes the percentage of your available credit you are using. For example, if you have a credit line of $3,000 and a balance of $1,200, you would be using 40 percent of your available credit.
Front-End Ratio
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One debt ratio lenders look at is called the front-end ratio, which measures the amount of your mortgage monthly payment to your pretax monthly income. Usually mortgage companies require you to document your income, such as by providing tax returns from previous years. For example, if your monthly mortgage payment is $900 and your pretax monthly income equals $3,600, your front-end ratio equals 25 percent.
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Back-End Ratio
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The other debt ratio lenders look at is called the back-end ratio, which measure the amount of your mortgage monthly payment plus any other existing debt payments to your pretax monthly income. Other debt payments would include things like student loans, car loans or credit card minimum monthly payments if you carry a balance on your account. It does not include monthly bills, such as utilities or your telephone service. For example, if your mortgage payment is $900, you have a $200 per month car loan and your pretax income equals $3,600, your back-end ratio would be 30.56 percent.
Considerations
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Bankrate suggests that mortgage companies prefer a ratio below 28 percent. Most lenders prefer to see a back-end ratio below 36 percent. These limits may be higher for FHA loans. In addition, if you have a high credit score, you may qualify for higher limits, but your rate of interest may be higher because you pose a greater risk of default.
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