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Debt to Income Ratios   

A note about debt to income ratios:                                                                                   

  1. After your credit report, the most important factor an underwriter will look at are debt to income ratios which are frequently referred to as Front and Back Ratios and are expressed as "28/36".

  2. The first or front ratio is your total monthly (principal, interest, taxes, and insurance) housing expense divided by your total monthly pretax income.

  3. The second or back ratio is your total housing expense plus all other monthly debt divided by your total monthly pretax income. For debt to income ratio calculation purposes, credit card debt uses the minimum monthly payment. Also, if you have installment debt (car payment) with less than 10 months remaining, we can ignore the debt for qualification purposes.

  4. Traditional underwriting restricted you to 28/36 debt to income ratios. However, progressive lenders have embraced electronic underwriting for improved debt to income ratios. These Artificial Intelligence programs have the ability to analyze your credit history, job stability, reserves, etc. and I am seeing debt to income ratios up to 40/49 for well qualified borrowers. Another reason to have a qualified Loan Officer do a thorough prequalification for you.

An example:
Suppose you make $60,000 per year and want to buy a home for $200,000 with a 20% down payment. Your loan will be for $160,000. Your Principal and Interest payment will be $1118, Taxes $185, and insurance of $30 for a total payment of $1333. Your payment divided by your monthly income of $5000 equals a 27% Front Ratio. Next, assume a $250 car payment, $100 in monthly credit card bills and $50 in student loans. Your proposed payment of $1333, plus other debt of $400 gives you a total debt of $1733 divided by your $5,000 monthly income for a Back Ratio of 36%. If the loan program requires ratios of 28/36 (many allow much higher ratios) you would be approved assuming good credit and some reserves. Simple? Not really, but debt to income ratios are one of the fundamental calculations you can make when thinking about a mortgage.

*Please note* If, after reviewing the information on debt to income ratios, you are concerned that you may have difficulty qualifying because your income is difficult to verify, please see the section on Stated Income and No Documentation loans. These products offer simple solutions.

For the the greatest flexibility and maximum loan qualifying ratios, you may be interested in the Cash Flow ARM. This may be the very best option for an investor.

As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your consumer and mortgage debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.

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