Easy First Time Home Buyer Debt to Income Ratio Calculator

Balancing scaleDid you know that mortgage companies use an income and monthly debt calculation to arrive at your maximum mortgage payment? This income ratio is commonly called the "front-end" and "back-end ratio". The "front-end ratio" is the maximum mortgage payment based on your monthly GROSS income and the "back-end" ratio is the proposed mortgage payment with your monthly debt (i.e. credit cards, car payment, alimony, child support, school loans, etc.).

You can estimate the "ideal" mortgage payment for an FHA, Veteran (VA), USDA, and conventional loan.

Simply enter your gross monthly income and monthly debt into the boxes and click calculate. That's all there is to it! The result is your ideal mortgage payment. The mortgage includes principal and interest on the loan, one month's real estate taxes, one month's homeowner's insurance and monthly mortgage insurance premium, if applicable.

  "Ideal" Monthly Payment
 
  Gross Monthly Income  
  Monthly Debt  
 
  "Ideal" Monthly Payment
  FHA & USDA  
  Conventional  
  VA  
 

Debt to income ratio explanation

The amount of money that you can borrow depends on your credit score, loan program, and the monthly debt that you are paying each month. The debt to income ratio is a simple formula that compares how much monthly income you earn against your monthly obligations.

There are two calculations. The payment calculation and the debt calculation. The payment calculation is the maximum mortgage payment if the applicant has little or no monthly debt. The payment calculation includes principal and interest, 1/12 of the real estate taxes, 1/12 of the homeowner's insurance premium, private mortgage insurance (or MIP), and any other required monthly obligations (i.e. homeowner's association fee, etc.).

The debt calculation, called the back-end ratio is the maximum amount of monthly debt, including the proposed mortgage payment that the applicant is permitted to carry for the loan program.

Here's the calculation:

Debt to Income Ratio Calculation
Gross monthly income $6,000
Monthly Payments: front-end ratio back-end ratio
Proposed Mortgage payment $800.00 $800.00
Car payment - 0 - $250.00
Minimum credit card payments - 0 - $200.00
School loans - 0 - $1,000.00
Installment loan - 0 - $50.00
TOTAL $800.00 $2,300
Debt to income calculation $800 / $6,000 $2,300 / $6,000
Debt ratio 13.33% 38.33%

Debt to income ratio for an FHA loan

The Federal Housing Administration uses the applicant's credit score to determine the debt ratio percentage for the monthly payment and monthly debt. For credit scores of 580 and greater, the "ideal" payment is 31% of the applicant's monthly income and 43% for the monthly debt and proposed mortgage payment. As you can see from the chart below, the FHA will allow a debt ratio as high as 40% for the payment and 50% for the debt ratio, with compensating factors. Learn more about FHA financing

Debt to income ratio for a VA loan

The Veteran's Administration approaches the debt to income ratio a bit differently from the FHA, USDA, and conventional loan lenders.

The VA only uses the back-end or debt ratio as the initial qualification for a VA home-loan. The VA believes the "ideal" debt ratio should be 41%. That means that the monthly loan payment without any debt should not exceed 41%, or, the proposed mortgage payment with monthly debt should be limited to 41% of the borrower's gross monthly income.

The Veteran's Administration requires one more calculation to determine the maximum loan amount, the calculation is called residual income. The VA believes that the veteran should have enough money at the end of the month to pay for food, utilities, child support, and other expenses. The residue income analysis is actually more important to the Veteran's Administration than the 41% debt ratio.
Learn more about VA financing

Debt to income ratio for a USDA loan

The USDA usually follows the FHA underwriting (approval) guidelines, however, the USDA departs from the FHA when it comes to the debt to income ratio. The USDA prefers a 29% payment percentage and a debt ratio of 41%. The USDA will permit higher ratio with tight limits.
Learn more about USDA financing

The conventional loan debt to income ratio limits

The conventional home-loans are mortgages that meet the lending guidelines of the Federal National Mortgage Association (Fannie Mae) and the Federal home-loan Mortgage Corporation (Freddie Mac). The conventional loans are not backed by the federal government and do not require any upfront mortgage insurance. These loans do require mortgage insurance when the purchase has a down payment less than 20% or if the loan is to refinance an existing mortgage, the equity must be at least 20% to avoid the private mortgage insurance cost.

The conventional debt to income limits the payment ratio to 31% and will permit the debt ratio to extend to 45% if the borrower meets the credit score and cash reserve requirements.
Learn more about conventional financing

Determining your monthly income

The lender uses different approaches to determine the applicant's monthly income. The most common way of determining monthly income is the year to date income calculation. The YTD income calculator will estimate your monthly income. The calculator can add up your monthly debt payments. See the year to date income calculator

Frequently Asked Questions About Debt To Income

Q. What affects the debt to income the most?
A. Without a doubt, your credit score has the greatest influence on your debt-to-income ratio. Credit scores are used by lenders to calculate your interest rate.
That may not seem fair, especially if your credit score has suffered as a result of a divorce or an unethical creditor, but this is the world we live in. A higher interest rate implies a larger monthly mortgage payment. The private mortgage insurance premium (PMI) for traditional mortgages is also affected by credit score.
PMI rises when the credit score falls.

Credit scores are not used by the FHA or USDA to determine monthly mortgage insurance costs. There are no private or monthly mortgage insurance fees with the VA loan program.

Q. How can I improve my debt to income ratio?
A. The first step to improve your debt to income ratio is to raise your credit score. It might mean delaying your purchase or refinance, but strengthening your credit may be the right decision in the long run. Catching up on past-due bills, paying off collection accounts and judgments, keeping your credit card balances at 50% or less than the credit limit can lift your credit score.

Another option is adding a co-signer. Co-signers work well with the FHA program. The FHA adds up your monthly income and debt and the co-signer(s) income and debt to calculate the debt to income ratio. Co-signers are not as effective with conventional loans and the VA only recognizes spouses for maximum eligibility. The USDA requires that the co-signer is an occupant of the home.

Consider debt consolidation

Debt consolidation may actually decrease your credit score for a short period of time, but, by lowering your overall monthly obligations you can give your ratio a boost.

Q. Cut the number of payments left to pay
A. The mortgage rules permit the underwriter (approval person) to overlook loan balances with less than 10 payments left on a loan. Use the YTD income and debt calculator to help determine the pay down cost.