Here’s how you can find your debt-to-income ratio and qualify.

“What exactly does it take to qualify for a mortgage?” Interest rates are rising, and I’ve received this question a lot recently as a result. Many buyers want to find a new home before rates increase further. If you’re in that boat but don’t know what you qualify for, today I want to break down what you need to qualify for a mortgage.

If you want to find out what you can qualify for, the first thing you need to do is calculate your debt-to-income ratio. If you’re a traditional employee, your lender will use something called a gross number, which is calculated by taking your gross income and dividing it by 12. If you’re self-employed, this number is your average net income from the last two years after subtracting all your business expenses.

From here, there’s a front end and a back end. The front end consists of all the expenses associated with the property you want. So if you want to buy a home, your front end would include your mortgage payment, property taxes, HOA fees, insurance, and Mello-Roos taxes, if applicable. Typically, the front end has to be below 36% of your gross income if you’re employed or your net income if you’re self-employed.

“Your lender won’t look at your grocery bills or how much you spend on gas.”

The front end is important, but the back end might be even more so. Back-end expenses include all your scheduled and paid expenses such as car loans, credit card debt, personal loans, and student loans. Typically, this needs to be below 45% of your gross income for employees and net income for those who are self-employed.

We’re in an inflationary period right now, so it’s more important than ever to understand your budget. You may qualify for a loan, but your lender won’t look at your grocery bills or how much you spend on gas. Be careful, and make sure you purchase a property you can afford.

If you are looking to purchase a home, please call or email me. I have relationships with a few specialized lenders ready to help no matter what your situation is. I look forward to talking with you!