OK – this probably is boring, but it is super important because almost every competitive mortgage loan available requires some sort of income verification and debt ratio calculations. This is a good thing because it ensures borrowers can actually make their payments (unlike the pre-2008 mortgage world).
Many borrowers and Realtors are confused about debt ratio specifics, so we thought a short blog was in order.
There are two categories of debt ratios: Front End, and Back End.
The Back End Debt Ratio consists of a borrower’s entire housing payment (Principle, Interest, Taxes, Insurance, HOA dues) and all consumer debt payments (car, student loan, credit cards) divided by his or her gross (pre-tax) income.
The Front End Ratio consists of ONLY the housing payment divided by gross income.
Allowable debt ratios range from 38% to 56.99%, depending on the lender and the type of loan.
Conforming Loans (Fannie and Freddie) have the same limit for Front End and Back End Ratios: 49.99%
FHA allows for Front End Ratios as high as 46.99% and Back End Ratios as high as 56.99%
Many jumbo lenders will not allow any debt ratio over 42.99%, and some cap ratios as low as 38%.
Higher debt ratios are tolerated when there are “compensating factors” such as large down payment, significant liquid reserves (savings), and excellent credit.
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