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How to Calculate Your Debt-to-Income Ratios

If you are in the process of becoming pre-approved to purchase a home, you’ve probably starting hearing the words “debt-to-income ratio” being tossed around. Along with your credit score, your debt-to-income ratios are one of the main factors which determine your home loan pre-approval. When a borrower comes in to meet with me for a pre-approval, I like to educate them on the importance of this figure, how it is determined, and what it means.

Front-end and Back-end Debt-to-Income Ratios

There are two types of debt-to-income ratios, your front-end ratio and your back-end ratio.  Your front-end ratio is the ratio of the proposed monthly mortgage payment and your gross monthly income.  Your back-end ratio is the sum of your proposed monthly mortgage payment and other monthly debt expenses divided by your gross monthly income.

Calculate Your Front-end Debt-to-Income Ratio

Total Your Proposed Mortgage Payment Including Principal, and Interest, Taxes, and Insurance (PITI)

divide by

Your Total Gross Monthly Income (include alimony/child support and 2 year average of bonus and overtime)

multiply by

100

Calculate Your Back-end Debt-to-Income Ratio

Total Your Proposed Mortgage Payment Including Principal, and Interest, Taxes, and Insurance (PITI)

+

Minimum Credit Card Payments

+

Car Loan Monthly Payments

+

Student Loan Monthly Payments

+

Alimony/Child Support Payments

+

Other Loans/Debt Reporting on Your Credit Report

divide by

Your Total Gross Monthly Income (include alimony/child support and 2 year average of bonus and overtime)

multiply by

100

Maximum Debt-to-Income Ratios

Standard accepted debt-to-income ratio requirements are 31/43 (front-end/back-end); however, you may be able to get approved with higher ratios depending on your credit score and cash reserves after you close.  I often see borrowers with significant student loan debt and large car payments which crush their dreams of homeownership, so it’s important to keep in mind the implications before you take on new debt if a home purchase is in your future.  I highly recommend these posts for further reading:

Your New Car Could Shrink Your Future House

Student Loans and Your Mortgage Pre-approval

Homebuyer Tips

Questions?  Need advice?  If you live in Virginia and are interested in starting the pre-approval process to purchase a home, my team at First Home Mortgage is here to help.  Feel free to contact us today.

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