When you apply for a mortgage, a lender calculates several qualifying ratios to make sure you can afford your new payment. The front-end debt-to-income ratio measures your monthly mortgage payment and related expenses as a percentage of your gross monthly income. If your new mortgage payment will eat up too much of your paycheck, you won’t qualify. To qualify for a loan insured by the Federal Housing Administration, your front-end ratio cannot exceed 31 percent. You can figure 31 percent of your gross monthly income to determine the maximum housing costs you can have in this type of loan.
Determine the monthly gross income before taxes you earn from your primary job. If you get paid biweekly, multiply your gross income from one pay stub by 26 and divide by 12. If you get paid weekly, multiply a single pay stub by 52 and divide by 12. For example, if you earn a $2,500 biweekly gross salary, multiply $2,500 by 26 and divide by 12 to get $5,417 in monthly gross income.
Add the monthly gross income you earn from your job to the monthly income you earn from other sources, such as from a side business, to figure your total monthly gross income. In this example, assume you run a part-time business that generates $1,000 in additional monthly income. Add $1,000 to $5,417 to get $6,417 in total monthly gross income.
Multiply your total monthly gross income by 31 percent to determine your maximum monthly housing expenses. These expenses include your principal and interest payment, taxes, hazard insurance, mortgage insurance premium and homeowners’ association dues. Continuing the example, multiply $6,417 by 31 percent, or 0.31, to get $1,989. This means your total housing costs must be $1,989 per month or less to qualify for an FHA loan.
- The 31 percent front-end ratio limit isn’t set in stone. If your monthly housing costs on a new loan will exceed 31 percent of your income, you might still qualify if you can prove certain compensating factors, such as a large savings account.
- The federal Home Affordable Modification Program, which helps struggling homeowners with their existing mortgage, uses the front-end ratio in a slightly different context. The front-end ratio on your current mortgage must be greater than 31 percent to qualify for the program. If you meet certain other requirements, the program reduces your payment to 31 percent of your monthly gross income to make it more affordable.