Calculating Debt to Income Ratios
It is very common and usual for lenders to use
debt to income ratios to determine your eligibility
for a loan and how much they will lend you. The
ratios most often used are the 28/36, however,
some lenders use the 29/41 ratios. The 29/41 is
generally used for FHA loans. So what do these
figures mean?
The first number, 28 (often called the front
end ratio) is the percentage of your gross monthly
income not including other debt that you can spend
on housing. This is your entire PITI number or
principal, interest, taxes and insurance.
The second number, 36 (commonly known as the
back end number) is the percentage of your gross
monthly income that can be spent on housing plus
revolving monthly debt and this is the total amount
of debt, housing debt plus revolving monthly debt
that you can spend. If you carry no other debt
besides the mortgage you will be allowed to spend
the full 36% of your gross monthly income on your
mortgage payment.
If you carry debt and pay out 510 % of your
gross monthly income on debt, this will reduce
the amount of money you will have available for
the mortgage each month and the lender will loan
you less money. The debt that you to pay must
be subtracted from your income because that portion
has already been promised to other sources.
Gross monthly is not what you take home each
month. The term used for what you take home is
your net amount. The net amount is the amount
minus state, federal and other taxes. Your gross
income is simply what your employer pays you,
if your salary is $40,000 that would be the gross
income used to calculate your debt to income ratio.
You will also need to take out any amounts for
401 K contributions costs associated with benefits
that you pay.
