Home buyers and homeowners often have questions about debt and income ratios when they enter into a home finance transaction.
Following are answers to some common questions:
How Is My Income Calculated?
When looking at your income, lenders start with your gross, or before tax, income, regardless of what tax bracket you might be in or what other deductions might come out of your pay before you see your net amount.
If you are on Social Security, for example, where there are no taxes, you would do something called “grossing up.”
You take whatever you receive and multiply it by 1.25 to arrive at what you would be able to use as income on a mortgage application.
How Is My Debt Calculated?
There are two ratios that lenders look at.
They are the front-end ratio and the back-end ratio.
Front-end Ratio
The front-end ratio is purely housing expense. This is your mortgage, plus taxes, plus property insurance, plus mortgage insurance, if you have that.
Back-end Ratio
The back-end ratio includes everything in the front-end ratio plus all of your installment and revolving debt.
Items here include car payments, credit card payments and any other type of debt for which you are obligated to make some type of payment monthly.
How Are Home Equity Loans Calculated?
Home equity loan payments are calculated as if the balance were as high as it could go.
Items that aren’t included on most mortgages, with the exception of Veterans Administration loans, are items such as food, gas and cable TV bills.