The chief criteria lenders use to determine the maximum mortgage amount to award borrowers is based on a set of guidelines known as debt-to-income ratios. In order to arrive at a specific figure for any prospective borrower, lenders will analyze their debt-to-income. Through the application of this formula, lenders will weigh the percentage of a borrower’s monthly gross income before taxes, with the intention of arriving at a feasible monthly repayment schedule. Most borrowers who do not meet the minimum requirements, such as those who have low monthly income, may not qualify for a mortgage.
Front Ratio vs. Back Ratio
The terms “front ratio and back ratio” simply refer to the types of calculations utilized by lenders as part of the application of the debt-to-income ratio determination. In the case of the front ratio, lenders will check factors like taxes, principal, mortgage insurance and interest, in a bid to find out the percentage of the borrower’s monthly income before taxes that can be applied towards monthly housing costs. Other expenses are included in the front ratio that may affect monthly housing costs, such as homeowner’s association fees. The back ratio includes a calculation of the borrower’s consumer debt. Typical consumer debts include installment loan repayments, credit card payments and other related factors such as car loan payments. The basic front ratio/back ratio calculation is based on 33:38, where the housing costs consume 33 percent and the consumer debt consumes no more than 38 percent of income. Failure to meet these two requirements may lead to an outright mortga
ge application denial.
These guidelines are somewhat flexible since other factors can affect the final outcome of a mortgage application. For instance, the credit standing of the prospective borrower plays an important role in the calculation of their eligibility. From this perspective, those with an excellent credit profile can expect to have a more positive outcome than those with a poor credit record. In the same way, those who are able to make a significant down payment, as opposed to just the minimum, may also receive a more favorable response from lenders. Some government institutions may accept other calculations of the front door/back door ratio, such as 29/41 percent. To further reduce the rigidity involved in the process of qualifying for a mortgage, some select lenders have entirely removed the front door ratio, leaving only a stated back door ratio percentage.
Calculating Your Monthly Income
In order to increase your chances of obtaining a loan, you may calculate your monthly income yourself in a similar manner that lenders use to assess your income. The process is more complicated than it sounds since various factors can affect the exact monthly income amount. Salaried workers may find the process a little simpler than self-employed individuals. The same applies to seasonal employees who may only work during certain periods. Mortgage calculators can help borrowers get an estimate of their monthly income.
Jenny E. is a professional writer who has written many articles for online platforms and print publications, including Personal Finance and Business. She also writes business proposals and grants for nonprofit organizations, as well as articles for Degree Jungle, a resource for college students.