What is a Ratio?

Here’s yet another term we use in real estate that consumers don’t understand until they get into the home buying process, but we tend to throw it around like everyone knows what it means.

When a lender qualifies you for a mortgage loan, they count up all your individual or joint income. Then they count up all the payments you make on debt, like car payments, credit cards, student loans, and things like that. Then, they start calculating ratios.

The first ratio, many times referred to as the “front-end ratio” is the percentage of your income that would be consumed by the house payment, including taxes and insurance. The second ratio, or “back-end ratio” is the percentage of your income that would be consumed by the house payment and other debt payments.

We won’t get into specific loan ratio limits of the different loan programs here, but a general guideline to use is 28% on the front-end, and 36% on the back-end, which are the usual ratio limits of conventional mortgages.

In our next post, we’ll talk about examples of calculating ratios.

For more information on loan ratios and purchasing your first home, visit our website at www.springfieldfirsthome.com, or call or text us at 417.872.9222.