Front-end debt-to-income ratio is a measure of how much of monthly income goes toward housing costs. That includes mortgage payments, property taxes, homeowners insurance premiums, and homeowners association fees, if applicable.
The front end ratio is often called the housing ratio. This calculation shows what percentage of your gross monthly income will go towards housing expenses. This includes mortgage payments, property taxes, homeowners insurance and any HOA dues.
One type of DTI ratio is the front-end ratio. In addition to the general mortgage payment, it also considers other associated costs, such as homeowners association (HOA) dues, if applicable.
The standard maximum front end DTI for conventional loans is 28 percent. When you apply for a new loan with a standard 20-percent down payment, the lender generally approves you for a request that does not exceed this limit.
Back-end DTI includes all your minimum required monthly debts. ... This includes debts like credit cards, student loans, auto loans and personal loans. Your back-end DTI is the number that most lenders focus on because it gives them a more complete picture of your monthly spending.
With the FHA, you're generally required to have a DTI of 43% or less, though it varies based on credit score. To be more specific, your front-end DTI (monthly mortgage payments only) should be 31% or less, and your back-end DTI (all monthly debt payments) should be 43% or less.
A Critical Number For Homebuyers
One way to decide how much of your income should go toward your mortgage is to use the 28/36 rule. According to this rule, your mortgage payment shouldn't be more than 28% of your monthly pre-tax income and 36% of your total debt. This is also known as the debt-to-income (DTI) ratio.
Lenders generally look for the ideal front-end ratio to be no more than 28 percent, and the back-end ratio, including all monthly debts, to be no higher than 36 percent. So, with $6,000 in gross monthly income, your maximum amount for monthly mortgage payments at 28 percent would be $1,680 ($6,000 x 0.28 = $1,680).
Lenders consider as debt any mortgages you have or are applying for, rent payments, car loans, student loans, any other loans you may have and credit card debt. For the purposes of calculating your debt-to-income ratio, insurance premiums for life insurance, health insurance and car insurance are not included.
The back end DTI is the ratio of all of your expenses appearing on your credit report plus your new mortgage payment including taxes and insurance divided by your gross monthly income. The back end DTI ratio does not include things like utilities, health insurance or groceries.
Principal, interest, taxes, insurance (PITI) are the sum components of a mortgage payment. Specifically, they consist of the principal amount, loan interest, property tax, and the homeowners insurance and private mortgage insurance premiums.
The front-end ratio calculates your total housing expense against your monthly income. The back-end ratio adds in recurring monthly expenses before coming up with a number that lenders use to evaluate your income against expenses. Lenders also look at your credit score as part of your qualifying package.
FHA loans only require a 3.5% down payment. High DTI. If you have a high debt-to-income (DTI) ratio, FHA provides more flexibility and typically lets you go up to a 55% ratio (meaning your debts as a percentage of your income can be as much as 55%).
PITI is an acronym that stands for principal, interest, taxes and insurance. Many mortgage lenders estimate PITI for you before they decide whether you qualify for a mortgage. Lending institutions don't want to extend you a loan that's too high to pay back.
So if you earn $70,000 a year, you should be able to spend at least $1,692 a month — and up to $2,391 a month — in the form of either rent or mortgage payments.
Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
The following payments should not be included: Monthly utilities, like water, garbage, electricity or gas bills. Car Insurance expenses. Cable bills.
*Remember your current rent payment or mortgage is not actually included in your DTI calculated by the lender. ... Using your current rent or mortgage payment amount in your own calculations can help you know if your new monthly mortgage expense would potentially be the same, higher, or lower.
Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. ... For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000.
The front-end ratio does not include other housing expenses like utility bills or cable TV services. If a borrower expects to pay $1,100 in monthly principal and interest, plus $300 in property taxes and homeowners insurance payments, the PITI costs would be $1,400 per month.
The back-end ratio is calculated by adding together all of a borrower's monthly debt payments and dividing the sum by the borrower's monthly income.
Most lenders view between 20-30% as being low risk, so they could offer better rates to borrowers. While some lenders have no set maximum and will assess applications on a case-by-case basis, others may accept a debt-to-income ratio of less than 45%.
What is the 50-20-30 rule? The 50-20-30 rule is a money management technique that divides your paycheck into three categories: 50% for the essentials, 20% for savings and 30% for everything else.
When someone is house poor, it means that an individual is spending a large portion of their total monthly income on homeownership expenses such as monthly mortgage payments, property taxes, maintenance, utilities and insurance.
Monthly housing payment (PITI)
Maximum monthly payment (PITI) is calculated by taking the lower of these two calculations: Monthly Income X 28% = monthly PITI. Monthly Income X 36% - Other loan payments = monthly PITI.