Thinking of applying for a loan to buy a home, but not sure of how much money you can spend? Ask your lender. When estimating how much you can afford, lenders will consider both your yearly income and debts. They use this to calculate the maximum amount of mortgage payment without making your debt-to-income (DTI) ratio higher than the allowable limits.
Once lenders have identified your maximum allowable home loan payment, they will use the current mortgage rates for backing in to the maximum approvable loan payment. Lenders check the two components of your DTI: front-end ratio and back-end ratio.
What is Your Front-End DTI Ratio?
The front-end DTI ratio compares your expected monthly home payments against your monthly income. The expected housing payment includes your home loan’s principal and interest payments, taxes, private mortgage insurance, and association dues every month.
While lenders don’t have a standard limit for front-end DTI, they prefer a rate of 28% or lower. This means that 28% or less of your monthly income must go to mortgage payments. You can get a home loan from Ogden lenders with a front-end DTI higher than 28%, as long as you both agree with the terms.
What is Your Back-End DTI Ratio?
The back-end DTI ratio includes your other monthly payment obligations. This may include your home and credit card payments, alimony or child support, car loan payments, and other debts. Lenders prefer your back-end DTI ratio to be 36% or lower. A back-end ratio of 36% or higher can still get you approved for a home loan, as some lenders accept a ratio of 45%.
Your debt-to-income formula will not show you the amount you must pay for a house; this only gives you an idea of the amount that you can afford to pay for your home purchase.