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Defining Your Debt To Income Ratio

If you are planning to apply for a mortgage, then your debt to income ratio will help to determine exactly how much mortgage you can get for your new home. Perhaps you weren't looking for a large loan, but then again maybe you want to learn what your limits are before starting to search for your new home. Regardless, knowing your ratio can help you determine exactly where you stand and help you avoid needless disappointment later on.

Your debt to income ratio is determined by your monthly gross income before taxes which is used to determine your housing costs which can include:

Your mortgage payment including principal and interest

Your property taxes

Your homeowners insurance

Your private mortgage insurance {if applicable}

Your association dues {if applicable}

In some cases your ratio is calculated to include your consumer debt which could be credit card payments, student loans, personal loans, etc. This first figure with the housing costs only is considered a front ratio; when consumer debt amounts are figured in the combined total is considered to be your back ratio. Thus, a mortgage lender could say that 32/37 is the ratio permitted to qualify for their loan, so if your monthly income is $6500 then your total housing costs can not exceed $2080 while your housing/consumer debt total must be no higher than $2405.

Happily, in many cases these guidelines are just that: they are guidelines and no hard and fast rule applies. Conceivably, if you were to be several percentages over in any one category, your mortgage lender may look at some other factors including your savings and credit score. Your lender may encourage you to put more money down in order to approve your loan or may simply approve you based on your great credit history.

With government backed loans, the debt to income ratio is actually a bit more relaxed. Thus, you may have a back ratio as high as 41% and still receive a loan taking into consideration that some of your consumer debt amounts could be unusually high. This is ideal for the person who has a bunch of outstanding student loans on their record but is having a difficult time finding a suitable mortgage.

Again the debt to income ratio figures are guidelines as there is some flexibility built in. If your income is very good and your credit rating high, then you could qualify above the limits depending on the decision of your mortgage lender.