Debt to Income Ratios, accurate?
A debt to income ratio is a guideline used by lenders to determine your maximum mortgage amount. It’s calculated as a percentage of your monthly gross (before taxes) income that is used to pay your monthly bills or debts. There are two types of calculations, a “front” and “back” ratio which lenders use to determine your maximum loan amount.
The front ratio is a percentage of your current housing costs. Anything related to your housing costs including rent, mortgage principal, interest, taxes, insurance, etc. will be included. The back ratio is calculated the same, but also includes all of your consumer debt payments. Items such as credit cards, student loans, car loans, or other similar debt payments.
A typical debt to income ratio is front 33% and back 38%. These percentages are just base guidelines and leders will be more relaxed or strick on lending based on other financial factors. A larger down payment and high credit scores will allow the lender to be more relaxed. Smaller or no down payment and bad credit will cause the lender to be much more strict with their lending power.
So with these base percentages if you have a combined monthly bring home pay check of $6000 a month your maximum monthly housing expenses should be no more than $1980 and your consumer credit expenditures should be no more than $2280.
So how accurate are these debt to income ratios? Should you depend on these nubers when you decide to purchase your next home? Remember these are just guidelines to follow and everyone’s financial situation is different. Debt to income ratio calculators don’t consider many other monthly expenses such as chariatable contributions, day care, food, enertainment, etc. They only assume the remaining percentage of income will cover these expenses. You should complete a detailed monthly budget before purchasing your next home. Make sure you can afford the payment and don’t take a lenders word!