Q:

How is your debt-to-income ratio considered for a home loan?

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Quick Answer

Mortgage lenders consider the borrower's debt-to-income ratios when evaluating whether or not the borrower can afford to repay the loan on the home, according to Bankrate. Credit history and down payment are also important for mortgage approval, but debt-to-income ratios indicates whether the borrower's income is sufficient.

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Full Answer

The two primary debt-to-income ratios that mortgage lenders consider are the front-end, or housing expense ratio, and the back-end, or total debt-to-income ratio. The front-end ratio indicates how much of the borrower's pretax income would be dedicated toward the mortgage payment and related expenses, such as property taxes, homeowner's insurance, homeowner's dues and the private mortgage interest premium. Ideally, this should not be more than 28 percent of gross income each month. Calculating this involves multiplying annual salary by 0.28 and dividing the product by 12, reports Bankrate.

The back-end ratio indicates gross income dedication toward all debt obligations. This includes the mortgage expenses listed above, as well as any child support obligations, student loans, car payments and credit card bills. This should not be more than 36 percent of gross income each month. Instead of using 0.28, lenders use 0.36 as the multiple when determining the back-end ratio. Lenders do not generally approve loans that go higher than either or both of these ratios, as stated by Bankrate.

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