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Front and Back End Ratios and Their Importance to Qualifying for a Mortgage

Posted by  on Apr 16, 2009
 
With the recent increase in the number of foreclosures and loan defaults, the mortgage industry as a whole has tighten the rules on securing mortgage financing. Aside from your credit scores, two of the more important factors in not only qualifying for a mortgage, but determining how large of a mortgage you are entitled to are what are called Front End and Back End Ratios.

Lenders are most concerned with the potential borrowers ability to make mortgage payments on a timely basis. With Front End Ratios, 28% is typically the magic number. Front End Ratios takes your monthly income and then calculates 28% of your monthly income to determine your maximum amount that can be spent on your mortgage expense which includes PITI = Principal, Interest, Taxes and Insurance.

For example, Annual salary $100,000/12 months = $8,333 x 28% = $2,333. In the example the maximum monthly mortgage payment would be $2,333.

Back End Ratios are used to determine how much of your income can go towards monthly expenses. These expenses typically include, rent or mortgage payments, car payments, credit card payments, medical bills, child support, student loans, etc. The magic number in this equation is typically 36%.

Using the same figures in the example above, at an annual salary of $100,000/12 months = $8,333 x 36% = $2,999.

It is best to figure these amounts out on your own and assess your own situation to assure yourself of getting a mortgage loan that will be affordable for you. It might be helpful for you to pay down or pay off some of your re-occuring debt obligations prior to securing a mortgage in order to qualify for a larger loan.

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