Debt Ratios

First, look at your monthly gross income, before taxes and contributions. This is how much you make per month, not how much you take home. What you take home is net income.
• Front-End Ratios
Lenders use what is called a front-end ratio, which is reflected as a percentage of your gross monthly income. The front-end ratio signifies the payment a buyer can reasonably afford, from a lender’s point of view. You may prefer a lower payment.
The front-end ratio for a FHA loan is 31%. For a conforming conventional loan, the front-end ratio is 33%. This means if your monthly gross income is $4,000, to qualify for the maximum FHA loan, your monthly principal, interest, taxes and insurance (PITI) payment can not exceed $1,240. For a conventional loan, it is $1,320.

Back-End Ratios

The back-end ratio reflects your new mortgage payment, plus all recurring debt. It, too, is computed on your gross monthly income. The back-end is higher than the front-end. For an FHA loan, the back-end ratio is 43%. For a conforming conventional loan, it is 45%
This means if your car payment is $300, and you pay $100 a month between two credit cards, your total monthly recurring debt is $400. On the FHA loan payment above of $1,240 PITI, plus $400 recurring debt, your total is $1,640. The back-end ratio number is $1,720 ($4,000 x 43% = $1,720). Your total debt is less than $1,720, so you qualify.
For a conventional loan, $4,000 x 45% (back-end ratio), equals $1,800. The total debt of $400, plus your new mortgage payment of $1,320 for a conventional loan equals $1,720. Your total debt is less than $1,800, so you would qualify for a conventional loan.

Call me today to calculate your debt to income ratios and determine how much home you can afford!

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