Q. I've heard that most lenders will allow a borrower to have a 28percent debt-to-income ratio in order to qualify for a home loan. What does this mean?
A. In order to minimize the chances of a borrower getting in overhis or her head financially, most of the lending industry has agreedthat a borrower's monthly housing expense should not be greater than28 percent of his/her gross monthly income (income before taxes).
For example, if gross monthly income for all wage earners livingin the home is $4,000, the monthly housing expense should not exceed$1,120. This 28 percent, often referred to as the "housing-to-incomeratio" or "front-end ratio," includes the monthly loan payment, realestate taxes/assessments, homeowners insurance, mortgage insuranceand association fees (for condo or town house owners). The allowablepercentage can vary by lender.
Q. What is the 36 percent debt-to-income ratio?
A. A lender may tell you the income qualifying ratios are 28/36.The 28 percent refers to that part of your gross monthly income thatgoes toward housing expenses. The 36 refers to the 36 percent of yourgross monthly income that can go toward all of your monthly debt(including housing debt).
This amount is often referred to as the 'total debt-to-incomeratio' or the 'back-end ratio.' In addition to housing costs, thissum can include monthly payments on credit cards, installment loans(auto, student loan, etc.), child support/alimony payments or othermonthly payments required by a court-ordered judgment. It does notinclude household expenses, such as utilities, food, clothing,entertainment and so forth. The allowable percentage can vary bylender and loan circumstances.
Mortgage Market Information Service
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