When lenders are considering potential buyers they look at more than just their gross income. They also look very closely at the buyer’s front-end and back-end ratios, as well as the amount of the down payment they can afford. We will take a closer look at what these factors are and why they are important.
1. Front-end ratio: The front-end ratio is the percentage of ones’ gross income that will go towards the monthly mortgage payment. The mortgage consists of principle, interest, taxes and insurance. Most lenders don’t want to see the front-end ratio higher than 28%. This means that the mortgage payment should not exceed 28% of ones’ monthly income.
2. Back-end ratio: The back-end ratio is the percentage of ones’ gross income that is required to cover debts. This includes the mortgage, credit card payments, child support and the like. Most mortgage companies would like to see this ratio stay below 36% of ones’ gross income.
3. Down payment: Lenders would like to see a down payment of at least 20%. A down payment of this amount will allow the buyer to skip out on paying expensive mortgage insurance.
Purchasing a home can be a very satisfying experience. It is a life-long dream for many and a great accomplishment. However, it can also be expensive, so ones’ total financial situation must be taken into consideration. One must not only consider ones income, but also expenses, debt, lifestyle and personality. Only after these things are carefully and completely considered is one ready to purchase a home.