Lenders use qualifying ratios to determine whether someone can actually make the stated mortgage payment on their mortgage loan. They do this by comparing a borrower’s debt levels, expenses, and projected monthly income, to see how much of someone’s income will be going toward their housing expenses.
There are a couple different types of ratios.
In the front-end ratio, or front ratio, monthly pre-tax income is compared with your proposed house payment. Many lenders would like to see a front-end ratio of 28 or lower, which means you’ll spend no more than 28% of your monthly gross income on your mortgage costs.
The second ratio that gets scrutinized is the back-end ratio, or back ratio. This looks at how much of your pre-tax income will go toward your house payment, plus all of your other monthly debt payments like credit card payments, auto loans, etc.
The ratios are important in determining whether the lender will lend you the requested amount of money.