WHAT IS BACK-END RATIO?
If you’ve ever started the process of preparing to purchase a home, your mortgage originator probably helped you calculate your “Front-End Ratio”. That means he or she calculated the amount of your gross income (before taxes and other deductions) that would go toward your housing costs such as your mortgage payment and insurance. Your ability to qualify for a mortgage is partially determined by your Front-End Ratio. The ratio is derived by dividing the entire house payment including taxes, insurance, and any HOA dues by the gross income.
Now, the “Back-end Ratio” is little different. If you’ve never heard this term, chances are you may already know what it is.
The Back-End Ratio aka the “DTI” (debt-to-income ratio) calculates the amount of gross income that goes toward paying ALL monthly debt payments including housing, credit cards, car loans, student loans any other debts. Here’s an example: A monthly gross income of $10,000 with $3,500 in monthly liabilities (debt payments) would have a back-end debt DTI ratio of 35%. Much like the Front-End-Ratio, this ratio is derived by dividing all reoccurring debt payments by the gross income.
SO WHY IS THIS IMPORTANT?
The front-end ratio requirements determine how much of a mortgage you can qualify for. The back-end ratio is generally acceptable if it is no more than 43% of your gross income. However, some lenders will allow for back-end ratios of up to 50% for borrowers with good credit. This ratio is how lenders determine whether you will be able to meet all your debts, including those related to your mortgage and housing expenses (insurance, taxes, etc.).
WHAT SHOULD I DO TO CREATE LOWER BACK-END RATIOS?
Sierra Pacific Mortgage has very helpful, friendly, and easy to speak with mortgage advisors who can assist with helping you learn about what your front-end and back-end ratios look like before you start your home search, what loan program you may need, and how you can best prepare yourself to take these big steps. Tips like paying off old bills or collections can help lower these ratios, and a Sierra Pacific mortgage advisor can help you look at these options and establish some goals for you to work toward.
WHAT CAN I DO ABOUT DTI?
Sierra Pacific Mortgage provides an affordability calculator via their SPM GO! Mobile app, that offers a quick look at your DTI ratio. By working with an SPM representative, you can learn how to improve your debt picture. This can all happen right now before you decide on what home to purchase, or at what home price, plus we can give you a realistic look at your credit picture, or any other details that will need addressing prior to obtaining your mortgage financing. For us, it’s all about making you comfortable and confident about your financial life. Then, when you’re ready, you’ll feel confident, educated, and ready to take on your next purchase, refinance, or property investment.