When you apply for a mortgage, there are some factors that play a major role in the lender’s approval process. Your credit score is a big example, and your income needs to be not only sufficient to afford the home, but it needs to be steady as well.
However, there are some factors that aren’t quite so obvious, and one is your other debts such as auto loans and credit cards. To be perfectly clear, you can still get a mortgage if you have a car payment, student loan payment, and/or credit card payments. But depending on how much you’re required to pay each month, they can be a limiting factor.
With that in mind, here’s how lenders use your debts when deciding to approve you for a mortgage.
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Two debt ratios
Lenders look at two different debt metrics when deciding to approve or deny your mortgage application, and to determine how much money you can reasonably borrow.
The front-end ratio is simply your new mortgage payment as a percentage of your pre-tax income. This includes the monthly principal and interest payment, as well as your property taxes and insurance. For example, if your pre-tax monthly income is $8,000 and your mortgage payment is $2,000, you have a front-end ratio of 25% (meaning that your mortgage consumes 25% of your income).
The back-end ratio includes your new mortgage payment as well as your other monthly debt obligations. This includes your car payment, student loan payment, any other installment loan payments, as well as the required payments on your credit cards. It does not include utility payments, auto insurance, or any other recurring obligations.
As a rule, if something isn’t included in your credit report, it isn’t part of your debt ratio. It’s also worth noting that these are also commonly referred to as your debt-to-income, or DTI ratios.
How much debt can you have?
The traditional limits for these are 28% for the front-end ratio and 36% for the back-end ratio, however it is possible to get a mortgage with significantly higher debt. In fact, Fannie Mae’s lending guidelines allow for debt-to-income ratios as high as 45% for otherwise highly qualified borrowers.
In a nutshell, the maximum allowable DTI ratio depends on your lender’s specific rules, as well as your other qualifications. And the mortgage amount you can qualify for with a certain DTI depends on a number of factors, including:
- Your pre-tax income
- The type of mortgage you’re applying for
- The current mortgage rate environment
- Your expected property taxes and homeowners insurance costs
However, if you’re curious about whether you can qualify for a specific mortgage amount, the best way to get a good estimate is to use our mortgage calculator to determine your expected monthly housing payment, add it to your other debts, and divide it by your pre-tax monthly income to find your DTI ratio. If it’s under 45%, there’s a solid chance you can get approved, assuming that your credit score and other qualifications are strong.
