Christian Debt Recovery

Income To Debt Ratio Calculator Fha

August 21st, 2011 |

Author: Gavin

Understanding FHA’s Rule of Ratios

Buying a home is a huge commitment, and requires a lot of care and upkeep. Buying a home is also a major financial responsibility, and in these times of financial upheaval it’s even more important that we know and understand exactly how much house we can afford, and whether or not we are comfortable with the payment we will be making. You have probably heard the term FHA Front-end ratio, and even after meeting with your loan officer you aren’t sure what it means.

This is why it’s important that you work with a professional who not only knows the local real estate market, but also knows the ropes on FHA loans and what they require. Understanding affordability is only one piece of the puzzle, but knowing how your debt and income factor into the transaction is important, because it will help you understand how you are getting qualified.

Front-end ratio is a term that refers to a percentage of your monthly income. The front-end ratio is what the lender looks at to determine what you can afford. An FHA approval is looking for a front-end ratio of 31%, meaning they want to see your level of outgoing obligations as no more than 31% of your income. Let me give you an example: Let’s say that you bring in $4,000 a month and you want to know what the maximum is that you can qualify for through FHA. At the 31% debt-to-income ratio, your payment with principle, interest, taxes and insurance can be no more than $1,240 a month. This is what the lender calls your front-end ratio.

There is also a back-end ratio when qualifying for a loan. The back-end ratio refers to your new mortgage payment, plus any recurring debt that you have. This ratio is always going to be higher than your front-end ratio, only because we are factoring in the new payment with your other debts. Let’s say that you have a car payment of $400 a month, and you have a monthly payment on a credit card of $100 a month. This means that your total recurring debt every month is $500 a month. If you take your monthly mortgage payment with principal, interest, taxes and insurance, plus your other monthly obligations of $500, then you have a total monthly obligation of $1,740. Your back-end ratio can only be 43%, so when you calculate this percentage, you will take $4,000×43% which equals $1720. So, with your monthly obligations being at $1,740, you are just over the limit to qualify. In very few cases, they may make an exception, but at all costs the best advice is to pay off as much debt as you can so that you don’t have to think about trying to qualify.

Now that you know a little bit about you qualify, you will be more prepared when you start the process. Preparation makes for less embarrassment, because you don’t want to just jump into buying a home because you think you need to. Buy a home because you want to make a home for you and your family, and have a place where you can hang your hat. For more information on how to achieve your goals with the help of an FHA loan, and to find your real estate professional today, go to www.projectbrooklynhomeowner.com.

About the Author

Mayer Dallal has been working in the Real Estate and Banking arena for more than 19 years, and is a highly respected in the industry. His passion is to help get renters into homes, and get them into their home for good.