Mortgage Calculations & Debt-to-Income Ratios
Two debt-to-income ratios and one loan-to-value calculation are used to underwrite a mortgage loan. The first debt-to-income ratio is the primary or front-end ratio, and the second ratio is the secondary or back-end ratio. The loan-to-value ratio determines how much equity you will have in your home when the loan process is completed.
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Primary Debt Ratio
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The primary or front-end ratio is the total of all monthly payments related to your home divided by your gross monthly income. Monthly home payments include the principal and interest payment for your home loan as well as your monthly property taxes, the monthly premium on your homeowner's insurance and any homeowner's association dues.
Secondary Debt Ratio
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The secondary or back-end debt ratio is the total of your home payments plus any revolving and installment loan payments divided by your gross income. Revolving debts include all of the minimum monthly payments listed on your credit report. Installment debts include any fixed monthly obligations such as student loans and auto loan payments. Any installment debt with fewer than 10 payments remaining does not count unless it is an auto lease payment. Lenders believe you will lease another vehicle when your lease expires.
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Loan-to -Value
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Loan-to-value, or LTV, is the ratio of your loan amount divided by your property's appraised value. For example, if your loan amount is $80,000 and your home's appraised value is $100,000, your LTV is 80,000 divided by 100,000, or 80 percent.
Tips
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Your lender is usually looking for debt ratios of 28 and 36. This means he wants a front-end ratio that does not exceed 28 percent and a back-end ratio that does not exceed 36 percent. Lenders will make exceptions if your credit score is over 700 and you have substantial cash reserves and excellent job stability. They will often stretch the limits to 34/38. The lower the LTV, the more the lender will stretch the limits. Lenders prefer LTVs of 80 percent or less.
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