Before approving you for a mortgage loan, lenders will look carefully at two of your debt-to-income ratios: the front-end and back-end ratios. The lower both of these ratios are, the more likely you are to earn an approval for your loan request. If your front-end ratio is higher than 31 percent, though, you might struggle to find a conventional lender who will loan you the mortgage amount you need to finance a home.
Lenders want to make sure that you are likely to pay back the mortgage money they lend you. One of the ways they determine this is to look at your front-end and back-end debt-to-income ratios, ratios that determine how much of your gross monthly income (i.e., your income before taxes are taken out) your debts consume each month.
Your front-end debt-to-income ratio calculates how much of your gross monthly income that your monthly housing payment take up. Your back-end ratio determines how much of your gross monthly income all of your monthly debts will consume. In general, mortgage lenders prefer that your monthly housing payment -- including principal, interest and taxes -- takes up no more than 28 percent of your gross monthly income. They prefer that your total monthly debts, which can include everything from your housing payments to your student-loan bills to your monthly minimum credit-card balances, take up no more than 36 percent of your gross monthly income.
Ratios That Are Too High
If your front-end ratio is higher than 28 percent or your back-end ratio higher than 36 percent, you might struggle to find a conventional mortgage lender who will approve your request for a mortgage loan. Lenders worry that borrowers with high debt-to-income ratios will become overwhelmed with debt should they take on a monthly mortgage payment. If this happens, these borrowers will be less likely to pay back their mortgage payments on time.
Improving Your Ratios
You can take steps to lower both your front-end and back-end debt-to-income ratios. You can either reduce your monthly debts or increase your gross monthly income. Once you do, you can reapply for a mortgage loan with your improved debt-to-income ratios.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.