If you are starting to look into buying a home you first need to understand what you can afford. In order for you to know what you can afford you need to figure out how much money per month you can pay towards a home mortgage payment. This is where a lender comes in. A lender will walk through a prequalification process with you and will let you know how much of a monthly payment you can qualify for. During the pre-qualification process the lender will focus on your front and back end ratio.

Front end ratio: The front end ratio represents how much of your gross monthly income is dedicated to housing expenses including your mortgage payment, property taxes, Home-owners insurance and any HOA fees. The front end ratio is used to understand how much of your monthly income before taxes you can dedicate to your home’s mortgage. Ideally 30% of your monthly income before taxes should be dedicated to your mortgage. To calculate the front end ratio take your annual income before taxes, divide it by 12 and multiply the number you get by .30.

Back end ratio: Back end ratio, also known as the debt-to-income (DTI) ratio, is a calculation that shows what percentage of a person’s gross income is used to pay monthly debt. This includes payments for housing, credit cards, car loans, student loans and other debts. When looking at buying a home you want to have a back end ratio that is around 45% of your monthly income before taxes. A lower back- end ratio indicates a lower risk, and lenders prefer a ratio of 45% or less. If you want to work on lowering your back end ratio to be able to qualify for your home’s mortgage, work on paying off all of your credit cards and if possible try and pay down some of those larger payments like your car payment or student loans if you can. To make a rough calculation of your back end ratio divide your total monthly debt expenses by your monthly income before taxes and then multiply that number by 100. 

If you would like a mortgage lender to give you a ballpark estimate of a mortgage payment you can qualify for or if you would like to schedule a time to go through a through a pre qualification or pre-approval process call John, Mortgage Loan Officer at Elevations Credit Union our preferred lender at (720)-285-9854.

Understanding your front and back end ratio will help you understand if buying right now is the correct option for you and the budget you have available when looking into home options.