When it comes to applying for a mortgage loan, people understandably get a little nervous.
Most of us don’t keep an eagle eye on our credit score and the way it’s calculated is a mixture of credit history, credit usage, and a little something hidden behind the curtain. Kind of like the Facebook algorithms that none of us can exactly figure out or the Great and Powerful Oz.
But over 26% of mortgages are declined for one reason, the Debt-to-income ratio.
What is a debt to income ratio?
It’s the comparison of your monthly debt payments to your monthly income. It’s also the number that mortgage brokers use to determine if they think you can afford to pay back the money you’re asking to borrow to buy a house.
Lenders offering mortgage services will look at two debt to income calculations when deciding whether or not to approve your mortgage application.
The front-end ratio is the percentage of your income that will be paid for housing costs. Mortgage principal and interest, mortgage insurance premiums, property insurance and taxes, and any required association dues. Adequate front-end ratios range from 29% for USDA loans to 41% for VA loans.
The back-end ratio is the percentage of your income required to pay all of your monthly debts. Not just your house note, but also any car payments, credit card payments, student loans, alimony, and child support. Acceptable back-end ratios range from 36% for conventional loans to 43% for FHA loans. (as of February 2020)
If either of the ratios is too high, your application will be denied.
Calculate your debt-to-income ratio
There are several online calculators for debt-to-income. You can find them here or here.
Or, you can talk to a local lender who can quickly tell you not just what your current debt to income ratio is, but how to improve that number if necessary. This is our favorite solution because it’s more than just a number. It’s the beginning of a plan to get you onto the home buying track.
