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Debt to Income Ratios

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 5-10 % 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.

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