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| MORTGAGE 101 con't |
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What are ratios?
When assessing whether to loan money to you or not, lenders will use various factors to determine just how risky it is to loan money to you. One of those factors is ratios. They will determine a front end ratio and a back end ratio.
- Front End Ratio - This ratio is based on your gross income. Some really smart person a long time ago said if you are giving more than “x” percent of your income to your mortgage, you will eventually wind up burden with debt and unable to pay your bills and buy your kids “G.I. Joe with the Kung Fu grip” (only those born before 1978 will be able to understand the latter part of that sentence) So, in order to decrease the amount of risk that the bank will have to foreclose on your house or incur debt by loaning to you, it was determine that no more than “x” of your gross income should go to your mortgage, taxes, and insurance, also know as PITI.
- Back End Ratio - this ratio basically says, your PITI plus monthly bills cannot amount to more that a certain percentage of your gross income (probably created by the same smart person). Essentially, it goes like this, “ok Mr./Ms. Customer, with an income of “x”, your mortgage, taxes and insurance plus you monthly bills cannot be more than “z” is we are going to loan to you”.
Keeping it simple, there are three (3) types of mortgages to choose from, Conventional, FHA, and VA.
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