The 36% Back-End Ratio
You’ve probably also heard the term back-end ratio when going through the home buying process. This may also be referred to as your debt-to-income, or DTI, ratio. This is the ratio of your total monthly debt payments to your gross monthly income. The 28/36 rule says that in addition to your front-end ratio being 28% or less, you also want your back-end ratio to be 36% or less.
It’s extremely important to understand the back-end ratio, because even if your front-end ratio is less than 28%, you may have other monthly debt commitments that could make you a higher risk when it comes to mortgage lending.
The back-end ratio includes your housing payments along with your other monthly payments, including credit cards, auto loans, student loans, personal loans or lines of credit, alimony and/or child support (if applicable), and more.
Let’s go back to the example above. If you’re paying $2,600 each month toward your home, and you’re also paying $400 toward your credit cards, and $500 toward your auto loan. Now, your monthly debt is $3,500. Divide this number by your $10,000 gross monthly income and you get 0.35. In other words, your back-end ratio is 35%. In this scenario, you should be able to comfortably and securely afford this home.