Debt-to-Income ratios are important for helping you to determine how much house you can buy and what your lender will approve for a mortgage amount. There are two different types of ratios lenders look at, the front-end ratio which is your housing expenses, and back-end ratio which is your total debt-to-income ratio.
The front-end ratio indicates how much of your monthly income will go towards your monthly payment, which includes principle, interest, real estate property taxes and homeowners’ insurance. The total payment should not exceed 28% of your gross (before taxes) monthly income.
To get an idea of what kind of a payment you can qualify for, take your annual gross salary and multiply it by 0.28 (28%), then divide by 12 months. For example, if your annual salary is $50,000, you may qualify for a monthly payment of $1166 (50,000 x 0.28 / 12 = 1,166).
When searching for a home on Nothnagle.com, each listing has a “Mortgage Calculator” feature that will help you estimate what your monthly payment will be for that particular property.
An additional factor that a lender will look at beyond the front-end ratio, is your total debt-to-income ratio (or back-end ratio). This takes into account not just your housing expenses but your total debts, including car loans, credit card payments and student loans. Your total monthly debt payments cannot exceed 36%. To calculate your back-end ratio, take your annual gross salary and multiply it by 0.36 (36%), then divide by 12 months. Using the same salary of $50,000, your monthly debt payments cannot exceed $1500.
Depending on your other debts, this may reduce the amount of monthly housing payment you can qualify for if you are carrying high credit card debt. To do a quick estimate, add up your monthly fixed payments – minimum credit card payments, car loan, student loan or other fixed debt. If these debt payments equal $600, that leaves $900 for your monthly housing expense.