Before buying your home, your lender wants to ensure you can actually afford your mortgage payment. Although good credit is always preferred, your lender also wants to compare your gross monthly income to your monthly debt obligations. The specific percentage of debt-to-income varies depending on whether you are seeking a conventional loan or some other type -- such as an FHA-insured loan. Zillow recommends having a debt-to-income ratio of 36 percent or less to increase your chances for approval -- especially if your credit is not perfect.
Your front-end ratio looks at how much of your income goes toward your mortgage payment -- including principal, interest and applicable insurance. Calculating your front-end DTI involves dividing your prospective new mortgage payment by your gross monthly income, including income of any co-signer on the mortgage application.
Back-end debt-to-income ratios look at your entire monthly financial picture. This includes your total mortgage payment, car loans, student loan payments, credit card payments and any other personal loans. Add up your total monthly obligations and divide the sum by your gross monthly income to figure your back-end ratio.
Typical DTI Requirements by Loan
If your loan consists of an FHA-insured loan, the maximum allowable front-end ratio is 31 percent and your maximum back-end ratio is 43 percent. VA home loans allow a 41 percent maximum for front-end and back-end ratios. Maximum debt ratios for conventional loans are significantly lower. The front-end ratio may range from 26 percent to 28 percent, while a back-end ratio from 33 percent to 36 percent is acceptable.
Getting Around a High Debt-to-Income Ratio
If your debt load is too high, even with perfect credit, lenders may deny your application. Because mortgage applications are processed on a case-by-case basis, there may be instances in which lenders will allow a higher debt load, such as if you have considerable liquid assets and you are making a considerable down payment. If, however, your lender is sticking to the rules and holding to its maximum debt load, you may need to find a suitable co-signer or lower your debt by paying off credit cards and other monthly installment loans. As with any loan, you should be comfortable with the amount of debt you are adding to your monthly payment to-do list. Even if your lender approves a higher debt load, consider whether you are capable of making a higher mortgage payment in addition to your other monthly obligations.
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