When you're buying a home, a lender will want to know your front-end and back-end debt-to-income ratios. The front-end is your mortgage payment divided by monthly gross income. The back-end is all of your debt, including the mortgage payment, divided by monthly gross income. If you seek a rural home or have served in the United States military, you can qualify for loans with ratios of 29 and 41 percent -- and a higher mortgage payment -- than with lenders who normally cap ratios as 28 and 36 percent.
Calculate your monthly income. Divide your annual before-tax pay by 12 months. For example, if you gross $48,000 per year, your monthly gross income will be $4,000 ($48,000 divided by 12). Add one-twelfth of the annual interest you receive from savings or investments, rent, annuities and disability payments paid to you. If you work for yourself, figure your monthly pre-tax profits. Include in your income one-twelfth of the annual child support and alimony payments you receive if you expect it to last three years and you have collected these payments within 12 months of your loan application.
Multiply your monthly gross income by 29 percent to arrive at the maximum mortgage payment you can afford; the mortgage payment consists of principal and interest as well as insurance and property taxes if the lender requires an escrow account for such.
Multiply your monthly gross income by 41 percent to calculate your back-end ratio. The back-end ratio is the maximum percentage of your gross monthly income that can be applied to your total debt payments under a 29/41 loan. This debt includes your mortgage plus all your other debts such as car and student loans, alimony and child support payments, credit card payments and other monthly obligations including the mortgage, you can afford. Alternatively, to see if you can afford a particular payment, divide the total of your mortgage and other debt payments by your monthly gross income to see if the quotient is greater than 41 percent.
Tips
Through its Single-Family Rural Housing Guaranteed Loan program, the U.S. Department of Agriculture, or USDA, backs loans made by banks and private lenders. To borrow directly from the USDA, you need to apply for a Rural Housing Direct Loan. For information on eligibility for loans guaranteed by the Veterans Administration, visit the VA website.
If you seek a USDA loan, verify that your selected home qualifies as a rural home and you meet income eligibility requirements.
Warnings
You need at least one year of work experience if you rely on part-time employment.
References
- U.S. Department of Agriculture: Rural Development: Underwriting Requirements -- Guaranteed Rural Housing Loan Program
- Utah Department of Financial Institutions: Debt-to-Income Ratio
- Realtor.com: Calculate Your Debt to Income Ratio
- U.S. Department of Housing and Urban Development: HUD 4155.1 -- Mortgage Credit Analysis for Mortgage
- U.S. Department of Veterans Affairs: Home Loan Guaranty
- U.S. Department of Agriculture: Rural Development: Eligibility
- Intuit Turbo Blog. "What Is Gross Monthly Income?" Accessed March 16, 2020.
- Mortgage calculator. "Calculate Your Debt-to-Income Ratio." Accessed March 16, 2020.
- FHA Lenders. "2020 FHA Debt-to-Income Ratio Requirements." Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "What Is PITI?" Accessed March 16, 2020.
- In Charge Debt Solutions. "Debt-To-Income Ratio." Accessed March 16, 2020.
- FHA. "FHA Loan Down Payment Requirements for 2020." Accessed March 16, 2020.
Resources
Tips
- Through its Single-Family Rural Housing Guaranteed Loan program, the U.S. Department of Agriculture, or USDA, backs loans made by banks and private lenders. To borrow directly from the USDA, you need to apply for a Rural Housing Direct Loan. For information on eligibility for loans guaranteed by the Veterans Administration, visit the VA website.
- If you seek a USDA loan, verify that your selected home qualifies as a rural home and you meet income eligibility requirements.
Warnings
- You need at least one year of work experience if you rely on part-time employment.
Writer Bio
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.