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How Your Debt-To-Income Ratio Will Determine What Mortgage You Can Qualify For


When approving a borrower for a mortgage in Walnut Creek, a lender will use many factors to assess their credit-worthiness. One of these factors is the debt-to-income ratio. A borrower’s debt-to-income ratio is one of the most important indicators of their financial health and mortgage companies rely on it heavily in weighing its decisions.

What is a Debt-To-Income Ratio?

Your debt-to-income ratio, or DTI, measures your debt burden in order to evaluate whether you are a good risk for the lender. In short, your debt-to-income ratio will compare what you owe each month to how much income you make. When applying for a mortgage, your debt-to-income ratio is just as important as your credit score.

Front End/Back End Ratios

There are two types of debt-to-income ratios that a lender will look at while determining a borrower’s creditworthiness:

  • Your front-end-ratio is the percentage of housing expenses taken against your monthly income. This includes things like your mortgage payment, any real estate taxes, your homeowner’s insurance and any homeowner association fees.
  • Your back-end-ratio is the percentage of all your monthly financial obligations taken against your monthly income. This will include any car payments, credit card payments, consumer loan payments, student loan payments, child support payments, etc. added to your housing expenses.

Is There an Optimal Debt-To-Income Ratio?

Lenders only want to lend money to borrowers who are at a low risk of defaulting on the loan. Simply put, the lower your DTI, the better. Borrowers with lower DTI ratios tend to qualify for better loan products at lower rates and more advantageous terms.

Most lenders would like to see a front-end ratio of no more than 28 percent and a back-end ratio of no more than 36 percent. But these are ideals and the DTI a lender will ultimately accept will also be dependent on the loan type and various other factors including the borrower’s credit score, the amount of down payment and large cash reserves or savings.

Different Loan Types Look at DTIs Differently

There are conventional lenders that will accept up to 45 to 50 percent back-end ratios depending on compensating factors. FHA loans recommend a DTI of 31 percent front ratio and 43 percent back ratio but will accept them as high as 46.99 for front and 56.99 for back with the right factors in place. In short, there are no hard and fast rules and each lender will make decisions based on the whole set of financial information they have before them.

Working with an Expert Can Help

Mortgage qualification is not an exact science. In most cases, the lender’s underwriter is making a judgment call about a borrower’s risk using a dynamic set of information. Therefore, having a mortgage professional working for you can be so important.

Working with a mortgage broker as an intermediary can make the difference between being approved or not. At Bridgeport Funding, we offer comprehensive mortgage services in Walnut Creek and throughout California. We work with a vast spectrum of lenders, understand their qualifying criteria and will intercede on your behalf. Call us at (925) 478-8630 for a no-cost consultation.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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