The Debt to Credit Ratio on a Home Mortgage

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    What Income Counts?

    • Most lenders use your pretax monthly income when figuring your debt ratios for mortgages. This is not the same as your take-home pay. For many people, their pretax income is significantly larger than their take-home pay. To find your pretax income, check your pay stub, or consult your W-2 form you receive that shows your total annual income and divide the result by 12 to find your monthly pretax income.

    Front-End Ratio

    • The front-end ratio represents the percentage of your monthly pretax income that will go toward your mortgage expenses. Calculate the front-end ratio by dividing your mortgage expenses by your pretax income and multiply the result by 100. For example, if your mortgage expenses equal $1,200 and your monthly income equals $6,000, divide $1,200 by $6,000 to get 0.2 and multiply 0.2 by 100 to get 20 percent. Most lenders want this ratio to be below 28 percent.

    Back-End Ratio

    • The back-end ratio is similar to the front-end ratio except that instead of just using your mortgage expenses, all monthly debt costs count. Debt costs include other loans such as student loans or car loans. Monthly expenses, such as your car insurance or telephone bills, do not count. Lenders tend to prefer ratios under 36 percent for the back-end ratio. While it is possible to still get a loan if you have a higher ratio, you may have to pay a higher interest rate.

    Other Factors

    • When calculating your total monthly mortgage expenses, your cost is not limited to just your monthly payment. Instead, most lenders also include the cost of property taxes and homeowner's insurance. In addition, if you cannot make a down payment of at least 20 percent and your lender requires private mortgage insurance, those costs will also be included as mortgage expenses. Therefore, you can end up being able to afford much less than you may have otherwise anticipated.

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