Standard Debt To Income Ratio – The standard debt calculation to your income ratio is used more often by lenders during a mortgage approval process. There’s usually an acceptable rate when calculating how much you owe, and if you can afford a home loan or not. It’s basically a percentage of income formula, and some financial institutions refer this as a chart.
In fact, most people don’t even know what it means. It’s a formula that banks use to calculate debt to income. They like to see a low percentage of what you currently owe.
There are two ratios that, together with the credit score, determine how qualified someone is for a loan. The first, and by far the more important, is debt to net income ratio, usually abbreviated DTI. This is used to calculate how easy it will be for you to repay your home loan given your current level.
The acceptable debt to income ratio chart is measured by dividing total mandatory outlays to service debt into your gross monthly income. Since the tax code gives you a deduction for mortgage interest, you qualify based upon your gross percentage of income formula. This ratio is broken into two discrete measurements, called front end ratio and back end ratio, for underwriting standards.
The front end ratio is the payments upon the proposed loan only (for example: principal and interest), whereas the back end ratio adds in all debt service: credit cards, installment loans, finance obligations, student loans, alimony and child support, and property taxes and homeowner’s insurance on the home as well.
With the current home lending environment, the front end ratio has become significant where it was formerly almost ignored, and more banks are paying attention to the debt as a new standard.