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Published: Friday, 7/24/2009

Your Mortgage Questions Answered

Q. I've heard that most lenders will allow a borrower to have a 28% debt-to-income ratio in order to qualify for a home loan. What does this mean?

A. In order to minimize the chances of a borrower "getting in over his or her head" financially, most of the lending industry has agreed that a borrower's monthly housing expense should not be greater than 28% of his/her gross monthly income (income before taxes).

For example, if gross monthly income for all wage earners living in the home is $5,000, the monthly housing expense should not exceed $1,400. This 28%, often referred to as the 'housing-to-income ratio' or 'front-end ratio,' includes the monthly loan payment, real estate taxes/assessments, homeowners insurance, mortgage insurance and association fees (for condo or town home owners). The allowable percentage can vary by lender, and FHA loans usually have more lenient ratios -- currently about 31%.

Q. What is the 36% debt-to-income ratio?

A. A lender may tell you that the income qualifying ratios are 28/36. The 28 refers to that 28% of your gross monthly income that goes toward housing expenses. The 36 refers to the 36% of your gross monthly income that goes toward all of your monthly debt (including housing debt).

For example, if the gross monthly income is $5,000, 36 percent of that amount equals $1,800. This amount is often referred to as the 'total debt-to-income ratio' or the 'back-end ratio.' In addition to housing expenses, this sum should include monthly payments on credit cards, installment loans (auto, student loan, etc.), child support/alimony payments or other monthly payments required by a court-ordered judgment. That $1,440 does not include household expenses, such as utilities, food, clothing, entertainment and so forth. It puts a cap on the amount of monthly payments that you are obligated to make. The allowable percentage also can vary by lender and loan circumstances. With an FHA loan this ratio can be stretched to 41%.

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