Home Affordability: How Debt to Income Ratios

Impact Your Home Purchasing Power

Home affordability is a factor that looms large in your decision-making process when contemplating a Tucson home purchase.  Real life isn’t like the fairy tales.  You don’t find the home of your dreams, make a flash decision about whether or not you want it, and then live happily every after -- without considering whether or not you can afford it. Here’s a breakdown of the factors involved.

Getting Inside Your Lender’s Head: Front and Back

Ratios

Lenders have established guidelines that they use when analyzing your financial life in deciding how much of a mortgage for which you’ll qualify.  They generally use two ratios -- front ratios and back ratios. 

Front Ratios

• Lenders determine your front ratio -- the percentage of your monthly income before taxes -- by combining estimated housing-related costs such as:
• Principal -- the portion of your house payment credited towards the amount financed
• Interest -- the money you pay to your lender for financing your Tucson home purchase 
• Taxes -- Annual property taxes and other assessments made by local government agencies 
• Insurance -- Homeowner’s insurance premiums that protect your home in the event of a covered loss 
• Mortgage Insurance -- Insurance premiums charged to protect your lender in the event of default (not always required)
• Homeowners Association Fees -- Fees charged in some real estate developments such as condos and gated communities for services and facilities intended for the common good of residents (not always required)

Back Ratios

Once your lender has determined your front ratio, they then move on to another computation -- back ratios.  Your lender will take the total of estimated housing expenses and add in all of your consumer debt, such as:

• Vehicle Payments
• Credit Card Debt
• Student Loans
• Other Consumer Debt 

By combining your estimated monthly housing expenses and your monthly debt load from consumer debt, your lender is better able to determine whether you’re capable of managing your monthly mortgage payment on top of any other consumer debt you might have.  The final step in computing this percentage is to determine the percentage of your monthly pre-tax income will go towards satisfaction of your consumer and housing debt.

Living With the Numbers

Your front and back ratios play a crucial role in determining whether you can afford the house you’re considering purchasing.  General lender guidelines call for front ratios of about 33%, meaning that no more than 33% of your pre-tax earnings should be allocated towards your housing costs.  Your back ratio -- which includes your front ratio and all of your other consumer debt, should total no more than 38% of your pre-tax income.

Exceptions to the Norm

While these front and back ratios -- also called your debt-to-income ratio -- give your lender a maximum figure for how much house you can afford, your comfort level can affect how much you should spend on monthly mortgage payments.  A good rule of thumb is to take the maximum amount your lender thinks you can handle and purchase a home that leaves you adequate money for non-debt-related expenses -- and which will allow you to live comfortably without spending every dollar your lender estimates that you can afford.

Your individual circumstances will play a role in how much house your lender believes you can afford.  There are a number of factors that can significantly affect how much you can borrow, including:

• Credit History -- How you’ve paid your bills in the past is considered an accurate predictor of how you’ll do in the future.  A lower credit score will usually mean lower allowed debt-to-income ratios.
• Down payment -- The amount of your down payment factors into how much house you can afford.  Having more of your money at stake increases the likelihood that you’ll honor your mortgage commitment.  
• Government Housing Program Rules -- FHA, VA, and other federal housing programs have varying debt-to-income rules, although they typically allow you to carry higher debt loads than conventional loan programs. 

Debt-to-income ratios are the single-most important factor to consider when determining whether or not you can afford the Tucson house you’re thinking about purchasing.  While other factors play a substantial role, none of it matters if you don’t have enough money in your checkbook every month when you sit down to write a check to your mortgage lender.  Browse affordable Tucson properties within the constraints of your debt-to-income ratio.  Allow us to recommend several exceptional Tucson lenders.