When you are applying for a mortgage or a loan modification, the lender will want to know if you have the capability to pay back the loan. They do this by calculating your debt to income ratio which is the percentage of your monthly gross income that goes toward paying debts. Your gross income is your entire income that your receive prior to any tax deductions.

The higher your debt to income ratio, the higher the chance that you will default on your payments in the future. If it is too high, you are denied, and if it is low or right on target, then you are approved.

There are two different types of debt to income ratios that you need to know about; back ratio, and front ratio.

The mortgage debt to income ratio is also commonly referred to as the “front ratio” which indicates the percentage of income that goes towards housing costs; such as your mortgage with principal and interest, mortgage insurance, property taxes and other fees. The “back ratio” indicates the amount of income that goes towards paying off all recurring debt such as credit card payments, car payments, student loans, etc.

To calculate your debt to income ratio, take the total amount that you will be paying for all debts and divide this by your total monthly income. When applying for a mortgage there are certain requirements that lenders have in regards to this debt to income ratio.

When trying to determine if you will qualify for a home mortgage, it is important that you understand these debt to income ratios and are able to determine if you have enough income to qualify. Mortgage servicers and investors always care about back end ratios when a new loan is being originated, as the back end ratio being more than 55% is deemed too high for long term on time payment on the 1st mortgage.

To qualify for conventional financing, the ratio is usually 28/36.  FHA limits differ from conventional ones and are typically 31/43, while VA limits are the least stringent and require a 41/41 ratio.

LOAN MODIFICATION DEBT TO INCOME RATIO REQUIREMENTS

Under the Home Affordable Modification Program, the target maximum amount for your mortgage payment (or mortgage debt-to-income) should be approximately 31% of your gross (pre-tax) monthly income. Based on your individual financial situation, under HAMP, your final modified payment may be above or below the 31%. However, I have seen many mortgage servicers over the last 8 years who will consider a debt-to-income ratio around 45-50% for an approval, and I have also seen back end ratios above 70% after modification.

As of the day of this writing, typical loan investors that are not Fannie or Freddie, or are not backed by FHA insurance, don’t want the housing payments (PITIA) of a borrower to exceed 31%, 38%, or 42% of gross monthly income in all the cases we have seen over the past seven years on successful loan modifications. As these ratio limits make the loan less likely to become late on payments in the future.

An overwhelming majority of trained Housing and Urban Development (HUD) counselors advise new prospective homeowners to budget and not spend more than 25% of their gross income on their mortgage payments, so the difference of opinion between agencies and entities of the government are profound.

LEARN HOW HOW TO FIGURE YOUR DEBT TO INCOME RATIO

In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:

* Yearly Gross Income = $60,000 / Divided by 12 = $5,000 per month income.
* $5,000 Monthly Income x .28 = $1,400 allowed for housing expense.
* $5,000 Monthly Income x .36 = $1,800 allowed for housing expense plus recurring debt.

You can also use our handy dandy free mortgage debt to income ratio calculator at this link to help you with the process.

As you can see, the mortgage debt to income ratio is an important figure to understand when you are looking into financially qualifying for a mortgage and loan modification.  All lenders will look at this ratio to determine if you are a quality candidate to receive a home loan, or modification.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.