For the consumer the mortgage world can seem so complex and confusing. I agree! I was there when I first came into the industry 13 years ago coming with no experience as a home owner myself, no experience in the industry, finance, real estate, NADA! A term you might hear a lot when buying a home or simply starting to play around with the idea of becoming a home owner is Debt to Income Ratio (DTI) or back end ratio. What is this and why is it so important you ask? Your Debt to Income ratio is calculated by dividing your monthly debt payments ( meaning anything that reports on your credit report or to the bureaus) including what your proposed mortgage payment will be or otherwise known as your PITI (principal interest taxes insurance) by your monthly gross income.
We have to figure that ratio out as different programs have different allowable ratios. Conventional financing usually caps out at 45% DTI. FHA financing 50% but will require additional compensating factors such as stability in your employment, credit scores above a certain number, evidence of consistent future increases in pay etc.
As you can see there is a lot that goes into this process of obtaining a mortgage. It helps to go into the transaction with a little bit of knowledge. Below is an example of a calculation to better help you understand.
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