The back-end ratio is the bankers’ way of assessing how much of your monthly income is committed to debt payments. The higher the percentage, the tougher it will be to qualify for a sizable mortgage.
You don’t need a master’s in banking to calculate your own back-end ratio. Simply start with PITI, as above. Add in any recurring credit card bills, car payments, consumer loans, and other regular monthly obligations. Then, take that amount and divide it by the gross monthly income. The maximum percentage you can have to qualify for an FHA loan is 41 percent, according to the Federal Housing Authority.
Example: Suppose you and your spouse both earn $60,000 per year. If both of you are on the mortgage application, your monthly income is $10,000 ($120,000/12) and your total monthly debt payments are $4,000, your back-end ratio is 0.40 or 40 percent. Most of the time, lenders prefer to see a back-end ratio of 36 percent or lower. But those with good credit can borrow more – and at better interest rates – and still qualify for an FHA loan with back-end numbers of up to 41 percent. Guidelines for Veterans Administration loans are similar.
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Posted by Bradford Miller Law, P.C.
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