Qualifying Ratios

Section: Qualifying Ratios and Loan Underwriting Estimated study time: 45 minutes Content: Mortgage lenders evaluate a borrower's ability to repay a loan using several qualification criteria, the most important being the debt-to-income (DTI) ratios. Two ratios are used: the front-end ratio (also called the housing ratio or PITI ratio) and the back-end ratio (also called the total debt ratio). The front-end ratio compares the monthly housing payment (Principal + Interest + Taxes + Insurance = PITI) to the borrower's gross monthly income. The back-end ratio compares total monthly debt obligations (PITI plus all recurring monthly debts such as car payments, student loans, credit card minimum payments, and other installment debt) to gross monthly income. Credit card balances and utilities are not included in the back-end ratio unless the minimum monthly payment appears on the credit report. Conventional loan guidelines from Fannie Mae and Freddie Mac generally permit a front-end ratio of up to 28% and a back-end ratio of up to 36%, though automated underwriting systems often approve borrowers with ratios up to 45–50% for strong-credit-score borrowers with compensating factors. FHA guidelines are somewhat more permissive: standard ratios of 31% front-end and 43% back-end, with higher ratios possible using manual underwriting for borrowers with compensating factors (substantial reserves, significant down payment, low debt). VA loans do not use a front-end ratio; they use a single back-end ratio guideline (41%) plus a residual income test — the borrower must have a minimum amount of money left over each month after housing and all debt payments. Lenders also evaluate the three Cs: Credit (credit score, credit history), Capacity (income stability and DTI ratios), and Collateral (property appraisal and loan-to-value ratio). FICO…