Front-End Ratio
Ever gone by a construction site and seen the big ol’ backhoes and crawlers with those huge buckets on the front moving dirt and rocks around? Those front-end loaders are amazing; they can really make quick work of big jobs, but if the bucket is overloaded, the machine can’t move (or even worse, it tips over) and the work can’t get done.
Let’s segue this discussion nice and smooth-like into the world of homebuying. To mortgage lenders, our financial sitch is a lot like one of those front-end loaders: the bank might be willing to loan us the money we need to make our dreams of homeownership a reality, but they’re not going to loan us so much that the payments are too heavy for our financial bucket. Said another way, they’re not going to loan us more than they think we can afford to pay back. And one way they figure out how much that is...is by calculating the front-end ratio, or how much of our income would go toward paying our mortgage.
The equation is fairly simple: lenders look at the monthly cost of ownership, including the mortgage principal and interest, HOA fees, property taxes, and any other taxes or insurance costs, and they divide that total amount by our gross monthly income. If the number is less than .28, or 28%, we are a lot more likely to get approved for that loan. There are exceptions: high down payments, good credit scores, the terms of our loan (like, if it’s an FHA loan), etc. And manageable or nonexistent student debt can help us get financed, even if our front-end ratio is higher than 28%.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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