Understanding debt-to-income ratios
Once you decide to go speak to a mortgage lender, you may walk away feeling a little overwhelmed. There are lots of new concepts you’ll have to understand (unless you just happen to be an Economics major in your college days).
One of those concepts is called the back-end ratio. Before you start imaging a truck backing up with its beeping sounds, let me explain. One’s back-end ratio is a reliable way to simply see if you can afford a certain property.
A back-end ratio describes your total debt-to-income numbers. It shows how much of your gross income would go toward all of your debt obligations. Debt obligations are widespread (of course), but always include your “regular” bills of your mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. (Note to self: if you can OWN a car, even an ugly one, rather than paying monthly payments on it, you’ll qualify for a larger home loan).
In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.
Then, when you’re ready to jump in and purchase a home, give us a call. We’ll find the right house for you. 