How Does My Debt To Income Ratio Affect My Mortgage Rate?
By Jim MichealsHow does a lender use my debt to income ratio to determine the mortgage rate they offer me when applying for a mortgage loan?
A debt to mortgage ratio is a common calculation lenders use to determine whether or not to offer financing to a potential borrower. This ratio also determines the potential risk of default by the borrower. Therefore, it is used to also help the bank determine the interest rates offered to a particular borrower for a mortgage loan.
What figures are used to calculate this ratio?
The debt to income ratio is actually two calculations. The Front ratio and Back ratio are calculated separately. The Front ratio is calculated by adding up all the borrower’s monthly debts and dividing this total by total monthly income. For most lenders, a Front ratio of 36% or lower is a healthy indication of a borrower’s ability to pay a mortgage. The Back ratio is calculated the same way, except that mortgage debt is excluded. A Back ratio of 28% or lower is considered a healthy number.
How does my debt to income ratio affect my mortgage rate?
Lenders combine many factors when setting rates. A higher ratio does not mean that the bank will not grant a mortgage. It does mean that the bank may decide that a higher ratio means a greater risk when all other factors are equal. A higher risk brings a higher mortgage rate.
What can I do with this information?
Calculating these ratios before applying for a loan can help the borrower detect potential problems with their debts. The borrower can then pay down debt or make other changes before going to the lender. Lowering the ratio can lower borrowing costs saving money. It can also qualify the borrower for a more expensive home
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- Should I Take Out A Debt Consolidated Mortgage?
- Is A Low Mortgage Interest Rate Always The Best Rate?
- What Happens When I Refinance My Home?
- Higher Credit Scores Mean Lower Mortgage Rates
