Recommended Debt to Income

A high debt-to-income ratio not only hinders chances of obtaining a loan, it also makes for unhealthy finances. The debt-to-income ratio represents the amount of debt owed compared to the amount of monthly income. Less debt with more income equals a desirable low ratio. Every adult should understand their own personal debt-to-income ratio for their financial health.

Front-End Ratio

The front-end debt-to-income ratio takes only the housing expense into consideration. It also uses pretax monthly income with the mortgage payment to determine the ratio. Homeowners should not have a front-end ratio higher than 28 percent, according to Bankrate. This means monthly mortgage payments should not exceed 28 percent of gross monthly income. Most banks won't give mortgages to those with a potential front-end ratio over 28 percent.

Back-End Ratio

The back-end debt-to-income ratio takes different debts into consideration. It uses not only the monthly mortgage amount, but also any other debts like car loans, student loans, credit cards, alimony or child support. This ratio also uses gross monthly income in it's formula. Consumers should stay below a 36-percent back-end debt-to-income ratio, states Bankrate. This means the sum of all monthly debt payments should not exceed 36 percent of gross monthly income.

Calculation

To calculate the maximum monthly housing expense using the front-end ratio, take the annual salary and multiply that times 0.28. Then, take that number and divide it by 12. To compute your maximum monthly debt expense using the back-end ratio method, also begin with the yearly salary. Multiply that times 0.36 and divide the answer by 12.

Included

Debt-to-income ratios always include property taxes, homeowners insurance and the monthly mortgage payment. That means the maximum housing expense or debt expense calculations include these costs, according to Bankrate.

Prioritization

Sometimes people wonder if they should save money for a mortgage down payment, or pay down their current debts to lower their back-end ratio. When the debt-to-income ratio exceeds the maximum allowed by mortgage banks, they won't lend money. This means anyone over 36 percent should pay down their current debt first. If the existing back-end ratio sits at over 20 percent, however, first pay down your current debts to 19 percent, then work on the down payment, suggests financial writer Michael Bluejay.