How front and back-end ratios determine your mortgage affordability

Are you searching for a suitable mortgage loan to buy a home of your choice? Before taking out a home loan, you should always calculate “How much of a mortgage can I afford?” It will help you to take out a mortgage loan that you can afford; that is, your financial condition will permit to make your monthly mortgage payments on time without any difficulty.

Calculating your mortgage affordability

When you apply for a mortgage loan, the lenders often calculate your front and back-end ratio in order to determine whether or not you’ll be able to manage the home loan comfortably. However, there is no fixed ratio and it keeps on changing from time to time.

• Front-end ratio – This ratio shows how much of your pretax (gross) monthly income would go towards your monthly home loan payments. It includes the interest, principal, insurance payments along with the property taxes that you need to pay. The lenders may require your front end ratio (or, housing ratio) to not exceed 31 if you want to take out an FHA (federally insured) mortgage. So, to know whether or not you qualify for an FHA mortgage, simply calculate your housing ratio by multiplying your annual salary by 0.31 and dividing the result by 12. The answer is your maximum housing expense ratio. If your monthly mortgage payment is less than 31% of your income, then you qualify for an FHA mortgage loan.

• Back-end ratio – It explains how much of your gross monthly income is utilized for making your debt payments. All your debt obligations are taken into account while computing your back end or debt-to-income ratio. It includes your car loans, student loans, credit card bill payments, etc. along with your monthly mortgage payments. The lenders may require your back-end ratio to be within 43% of your pretax income if you want to obtain an FHA mortgage. So, multiply your annual salary by 0.43 and divide the obtained figure by 12. You will get your maximum allowable back-end ratio. You can take out an FHA loan if you utilize not more than 43% of your monthly income towards paying off your debts.

In addition to the above factors, the lenders also consider your credit history and how much you’ve accumulated for the down payment on your home. This is because you may avoid purchasing a PMI (Private Mortgage Insurance) if you are able to pay at least 20% of the home purchase price.

Taking help of a mortgage calculator

You can use a calculator to compute “How much of a mortgage can I afford?” Browse through the mortgage related sites to find a calculator by using which you can calculate your front and back end ratio. To get the result, you’ll have to supply some basic information, such as, your gross annual income, your monthly debt payments (both secured and unsecured loan payments), etc.

While choosing a calculator, make sure that you select one from a reputed website so that the calculations are accurate.