One crucial financial task to complete before you buy is to improve your debt-to-income ratio.
What Is Debt-To-Income Ratio? Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward paying all of your debts and liabilities, which includes your mortgage, credit card debt, student loans, and housing expenses. In simple terms, it’s the percentage of your income that goes towards your debt payments. Your DTI ratio is important because lenders use it to assess how much of a lending risk you may be.
The Components of Your DTI. Your DTI ratio has two parts: front-end ratio and back-end ratio. Your front-end ratio is the percentage of your gross monthly income that goes toward your monthly housing payment. To calculate your front-end DTI ratio, divide your monthly housing payment (principal, interest, insurance, taxes, etc.) by your pre-tax monthly income. Your back-end ratio measures your gross monthly income against all of your recurring monthly debts and liabilities and is considered the more important component of your overall DTI ratio. To calculate your back-end ratio, divide your total monthly credit card debt, student or personal loans, housing expenses, etc. by your pre-tax income.
What Is Considered a Good Debt-To-Income Ratio? Generally, you’ll want your front-end ratio to be less than 31 percent. If it’s higher, that may be a red flag if you’re applying for a mortgage, although there is some flexibility in some cases. Under the Consumer Finance Protection Bureau’s Qualified Mortgage rules, most mortgages require a back-end ratio of 43 percent or less. There are exceptions for certain types of loans and certain situations, however. Fannie Mae has recently stretched that limit to 45 percent or more for borrowers that had certain factors in their applications, such as a very high credit score or quite a bit of cash reserves.
For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988.
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