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Front end and back end mortgage debt-to-income ratios

What are the front end and back end debt-to-income ratios for a mortgage?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

In short, a debt-to-income ratio indicates how much of your monthly gross income you can spend on monthly debt expenses for your mortgage, housing-related costs and other loans with recurring monthly payments. Lenders apply the front-end and back-end debt-to-income ratios to determine what size mortgage you qualify for.

The front end debt-to-income ratio represents the maximum allowable percentage of your monthly gross income that can be spent on total monthly housing expense which is comprised of your mortgage payment (principal and interest), homeowners insurance, property taxes and other potentially applicable housing-related expenses such as mortgage insurance, homeowners association (HOA) fees and flood insurance. Even though you pay for some of these expenses on an annual or semi-annual basis, the lender calculates their monthly cost and includes them in the debt component of your debt-to-income ratio.

The back end debt-to-income ratio represents the maximum percentage of your monthly gross income that you can spend on total monthly housing expense plus other monthly debt payments for credit cards, student loans and auto loans and leases. Because it includes all of your monthly debt expenses, most lenders focus on your back-end debt-to-income ratio to determine what size mortgage you can afford.

Review How the Debt-to-Income Ratio for a Mortgage Works

The example below demonstrates the front end and back end debt-to-income ratios for a mortgage.

Monthly Gross Income: $6,000

Expenses included in front end debt-to-income ratio

Monthly Mortgage Payment: $1800

Monthly Property Tax: $200

Monthly Homeowners Insurance: $100

Total Front End Debt-to-Income Ratio Expenses: $2,100

Front End Debt-to-Income Ratio: 35% ($2,100 / $6,000 = 35%)

Expenses included in back end debt-to-income ratio

Monthly Credit Card Payment: $300

Monthly Car Payment: $200

Monthly Student Loan Payment: $100

Back End Debt-to-Income Ratio Expenses: $600

Back End Debt-to-Income Ratio: 45% ($2,100 + $600 = $2,700 / $6,000 = 45%)

The above example presents one case but highlights several important points about the debt-to-income ratios for a mortgage. First, your ratio is based on your monthly gross income, or income before any deductions such as taxes, social security, medicare and retirement fund contributions.

Second, the debt figure used in your debt-to-income ratio is based on your monthly debt payments and not your total debt balance. For example, if you make a $200 monthly payment on a $10,000 car loan, $200 is included in the debt figure used to calculate your debt-to-income ratio and not the $10,000 car loan balance.

So what front end and back end debt-to-income ratios do lenders use for a mortgage?

Debt-to-income ratios vary by lender, mortgage program, loan type, borrower financial profile, credit score and loan-to-value (LTV) ratio but most programs and lenders apply a maximum debt-to-income ratio of 43% to 50%.

This means you can spend a maximum of 43% to 50% of your monthly gross income on total monthly housing expense plus other monthly debt payments and lenders use this figure to determine what size mortgage you can afford based on current mortgage rates and other factors.

For example, if you earn $5,000 in monthly gross income, applying a 45% debt-to-income ratio means that you can spend $2,250 on total monthly housing expense including your mortgage payment, property taxes and homeowners insurance plus any other monthly debt payments you have.

The lower your non-housing related monthly debt payments, the more you can spend on your mortgage payment and the higher the mortgage amount you qualify for. For example, someone who earns $5,000 a month and has no monthly debt payments can qualify for a higher mortgage amount than someone who earns $5,000 a month and has $600 in monthly payments for credit cards and other loans.

Use ourDebt-to-Income Ratio Mortgage Calculatorto determine the loan amount you can afford

While lenders guidelines typically only include a back end ratio, the 43% to 50% range implies a front end debt-to-income range of 32% to 39% based on standard borrower monthly debt levels.

As noted above, the debt-to-income ratio that applies to you varies depending on your mortgage program and other factors. For example, the ratio used for a conventional mortgage may be different than the ratio used for the FHA, VA, USDA or other low down payment mortgage program. Additionally, some lenders use their own debt-to-income ratio guidelines to determine what size mortgage you can afford.

We recommend that you check with your lender at the beginning of the mortgage process to understand the debt-to-income that applies to you and how the ratio impacts what size mortgage you qualify for.  Contact multiple lenders in the table below to understand their debt-to-income ratio guideline and what size loan you can afford.  Shopping multiple lenders is also the best way to save money on your mortgage.

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

Finally, in some cases it may be possible to exceed the stated debt-to-income ratio guideline for a mortgage program if there are additional positive factors that support your application such as if you have significant financial reserves, income not reported on your loan application or if you are making a large down payment. Using a higher debt-to-income ratio usually requires extra documentation and effort by both you and the lender (called manual underwriting) but may enable you to qualify for a higher mortgage amount.

Sources

Mortgage Debt-to-Income Ratio: https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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