Understanding the Debt-to-Income Ratio: How Much of a Mortgage Can You Afford?

Before you even consider WHAT kind of home mortgage loan you’re looking for, you should have a clear idea of HOW MUCH you can afford to pay.

In order to determine your maximum mortgage amount, lenders use a guideline referred to as a debt-to-income ratio (DTI). This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts.

Because there are two calculations, there is a “front” ratio and a “back” ratio and they are generally written in the following format: 33/38.

The front ratio is the percentage of your monthly gross income that is used to pay your housing costs, including principal, interest, taxes, insurance (PITI), mortgage insurance (when applicable) and homeowners association fees (when applicable).

The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses.

A common guideline for debt-to-income ratios is 33/38. In this scenario, a borrower’s housing costs consume thirty-three percent of his/her monthly income. Add in monthly consumer debt to the housing cost and it should take no more than thirty-eight percent of one’s monthly income to meet such obligations.

Of course, this is merely a guideline. If you make a small down payment, for instance, the guidelines are more rigid. They also vary according to loan program. For an FHA mortgage, guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.

If all this seems confusing, take a deep breath. Relax. A mortgage broker can help you understand how to weigh income levels versus home loan expenses. We suggest consulting with one as soon as you can.