Debt-to-Income Ratio to Buy a House

Understanding factors that affect mortgage loan approvals

Qualifying for a mortgage loan involves more than having a good credit score and an income source. Mortgage lenders take a close look at your debts to see if you qualify for a mortgage loan. A high debt-to-income ratio can disqualify you for a mortgage. Before applying for a home loan, educate yourself on debt-to-income ratios.

Definition

Debt-to-income ratio refers to the amount of your income spent on your home loan and other debts each month. Mortgage lenders review your income statements such as tax returns and paycheck stubs, and after reviewing your credit report acquire a listing on your minimum debt payments, they calculate how much you spend on debt payments each month. Lenders calculate debt-to-income ratio by dividing total debt payments by your gross monthly income. For example, paying $1,000 on debt payments each month with a monthly gross income of $3,000 equals a debt-to-income ratio of 33 percent.

Front-end Ratio

Mortgage lenders consider two debt ratios when approving applicants for a mortgage loan. The front-end ratio refers to the percentage an applicant spends on his housing payments each month. As a rule, the housing ratio should not exceed 28 percent of an applicant's gross monthly earnings, says Bankrate.com. Lenders determine the housing ratio by taking the home loan payment and dividing this figure by the applicant's gross monthly income. For example, a gross monthly income of $6,000 and a mortgage payment of $1,400 equals a housing ratio of 23 percent.

Back-end Ratio

Being under the 28 percent cutoff isn't the only factor lenders take into account when approving home loan applications. Lenders also evaluate the back-end ratio, which refers to total debt payments -- including the new mortgage payment. The total debt ratio cannot exceed 36 percent of an applicant's gross monthly earnings, says Bankrate.com.

Improving Debt-to-Income Ratio

Applicants who exceed the debt-to-income ratio for a particular mortgage amount can still qualify for a home loan by selecting a home with a lower price tag. Reducing consumer debts such as eliminating credit card debt and waiting until car loans and other loans are paid off helps applicants qualify for a higher mortgage loan. Applicants can also increase their purchasing power by increasing their income. Securing a higher paying employment opportunity or purchasing the home with a joint applicant can reduce debt-to-income ratios and improve the approval odds.

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