Debt ratios are a percentage of your continuing debt compared to your gross monthly income. Continuing debt would include a car payment, student loans, monthly credit card payments or any other type of debt that will carry over with you and continue with your new San Mateo County home purchase. This does not include utilities or other types of living expenses. Your debt ratio is one of the components a lender will use to determine how much home you can afford and determine their risk in giving you a loan to buy a home in San Mateo County.
What is Your Front End Ratio?
Your front end ratio takes your total house payment, including your monthly tax and insurance payment divided by your monthly gross income. For example, say your San Mateo mortgage payment including taxes and insurance is $3,000 and your gross monthly income is $10,000, your “front end ratio” is 30%.
What is Your Back End Ratio?
Your back end ratio includes your housing ratio plus any other debt listed on your credit report, divided by your gross monthly income. For example, say you have a $3,000 monthly mortgage payment, a $350/month car payment, a $250/month student loan payment and a $100/month credit card payment with a gross monthly income is $10,000. Your total debt per month is $3,700 and your back end ratio is $3,700/$10,000 = 37%
How Does My Debt Ratio Affect How Much I Can Afford?
Each lender and loan program has different guidelines for debt ratios and they are just that…guidelines. There are no hard and fast rules as your assets, down payment and income all could compensate and offset a higher than normal debt ratio.
What is the Maximum Debt Ratio Allowed?
To give you an idea of the lender’s guidelines, the following debt ratios are considered reasonable:
| Loan Type | Front End | Back End |
|---|---|---|
| Conventional | 28% | 36% |
| FHA | 31% | 43% |
Although these are posted guidelines by Fannie Mae, Freddie Mac and FHA, these ratios can be pushed as high as 55% on the backend with compensating factors.
There is Only One Way to Know What You’re Qualified to Borrow
Get pre-approved. Come in and sit down with us, call us on the phone at (650) 520-0915, or send us an email at info[@]SanMateoMortgageBlog.com. We’ll gather all of the necessary information, present loan programs that meet your short and long term financial goals and give you a genuine pre-approval, which will explain exactly how much you can afford in today’s lending market.
Other Posts You May Enjoy
- The Process for Getting a Home Loan
- How to Accept a Down Payment Gift from Family
- What is APR?
- When Should I Run My Credit?
- Why It is Imperative to Get a Pre-Approval Before Submitting an Offer
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Chris Williamson is a Mortgage Advisor with Mortgage California specializing in San Mateo Mortgage.
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