What are the two calculations used to determine if a borrower can qualify for a mortgage?

The two calculations used to determine if a borrower can qualify for a mortgage are the Debt-to-Income Ratio and the Housing Expense Ratio. These ratios play a crucial role in assessing a borrower's financial health and ability to repay a loan.

The Debt-to-Income Ratio (DTI) measures the percentage of a borrower’s gross monthly income that goes towards monthly debt payments, including the mortgage payment, credit cards, car loans, and other obligations. Lenders typically look for a DTI below a certain threshold, usually around 43%, to ensure that borrowers are not overwhelmed by debt and can comfortably manage their mortgage payments.

The Housing Expense Ratio, often called the Front-End Ratio, focuses specifically on the proportion of a borrower’s income that is spent on housing-related expenses. This includes the mortgage payment (principal and interest), property taxes, homeowners insurance, and any applicable homeowner association fees. A common guideline is that this ratio should not exceed 28-31% of the borrower’s gross monthly income, further indicating that the borrower can afford their housing costs.

These calculations provide lenders with essential insights into a borrower's financial capacity, enabling them to make informed lending decisions based on risk assessment. Other options provided, while relevant to the mortgage application process, do