Call us today: (949) 268-7742

Infographic: Debt to Income Ratio Explained

by So Cal VA Homes
Comments are off for this post.

Debt to Income Ratio Infographic


What is a debt-to-income ratio?

Debt-to-income ratio is a percentage, a number that compares a buyer’s proposed housing costs and debt payments to their gross monthly income. Debt-to-income ratio is a metric that gives lenders a clear idea if a buyer will be able to afford future mortgage payments.

How is your debt-to-income ratio calculated?

Debt-to-income ratio is calculated by dividing monthly debt payments by monthly gross income. The resulting number is then given as a percentage. There are two forms of debt-to-income ratios: a “front-end” ratio and a “back-end” ratio.” The front-end ratio compares a buyer’s proposed housing and mortgage expenses to their gross income, the amount of money they earn each month before taxes and all payroll deductions. The back-end ratio measures the amount of a buyer’s gross income that goes toward major existing debt, including housing expenses.

What is a good debt-to-income ratio?

Lenders vary to some degree in what they consider an ideal debt-to-income benchmark. For conventional loans, an ideal front-end ratio is conservatively no more than 28%, and the back-end ratio should be no more than 36%. Lenders’ guidelines differ when it comes to a maximum debt-to-income ratio when deciding to approve a mortgage. The maximum debt-to-income ratio for conventional loans typically falls right around 50%. VA home loans technically do not have a maximum debt-to-income percentage and discretion falls on the lender.

Why is lowering your debt-to-income ratio important before attempting to buy a home?

There are a number of important reasons to make an effort to lower your debt-to-income ratio before applying for a home loan. A low debt-to-income ratio gives buyers more credit bandwidth to afford future mortgage payments. It also frees the borrower of past debt as they move forward into homeownership. A low debt-to-income ratio will make it more likely that you will get approved for a mortgage. It gives lenders a way to measure not just whether a person can take on a mortgage, but what mortgage amount the borrower can reasonably be responsible for. Lenders are concerned with a buyer’s debt-to-income ratio because it allows them to gauge a borrower’s ability to afford future mortgage payments. A low debt-to-income ratio tells lenders that a buyer is not likely to foreclose on the loan in the future.

Share this Image On Your Site

Share this article

Comments are closed.

Featured on the 5.00 O'Clock News

Innovators for Veterans Featured In