Buying a home is the largest purchase that most people make in their lives. Homeowners -- as well as lenders -- should enter into a mortgage with confidence that the homeowner will be able to afford the mortgage. A person who defaults on a mortgage could lose his home. Likewise, the lender is certain to lose money if the borrower does not make payments. Borrowers and lenders both should examine the borrower's debt-to-income ratio before a loan is approved.
Front-end Ratio
The front-end ratio in your debt-to-income ratio considers the amount of your pretax monthly income that would be applied to paying the monthly mortgage payment. The general rule is that a borrower should not pay more than 28 percent of his monthly amount earned to his mortgage payment. This includes the principal, interest, real estate taxes and homeowner's insurance. FHA loans require a front-end ratio of no more than 29 percent.
Back-end Ratio
The back-end ratio calculates all of your financial obligations, including car payment, credit card balances, student loans, child support and alimony. This also includes the proposed mortgage amount. The general rule for determining if a borrower is eligible to receive money is that he should have a back-end ratio of 36 percent of his total income or less. FHA loans require a back-end ratio of no more than 41 percent.
Calculations
Calculate the front-end ratio by multiplying your annual salary by 28 percent, or 0.28. Then divide this amount by 12, representing a monthly outlay. The answer is the your maximum housing expense ratio.
Determine the back-end ratio by multiplying your yearly salary by 36 percent, or .36. Then divide this amount by 12. The result is the amount that your monthly debts should not exceed.
Other Considerations
Lenders do not only take your debt-to-income ratio into account when determining if they will allow applicants to borrow money. Lenders also look at your credit history, which shows if you have made a habit out of paying your accounts on time or if you have missed payments. The lender also will examine your job stability. The longer you have been with your employer, the better your odds of securing the loan.
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