Housing to Income

• Lenders want your monthly housing costs for the home you are buying to be no more than 28 percent of your gross monthly income. This ratio is also known as the front-end ratio, or housing expense ratio. Loans through the federal government allow a ratio of up to 29 percent in this category. Your total housing costs in this calculation include your principal and interest payments on the mortgage, property taxes, homeowners insurance, private mortgage insurance and homeowners association dues, if applicable.
  
  

Debt to Income

• The other major ratio, called the debt-to-income or back-end ratio, considers all of your debt commitments in comparison to your gross income. Other debt commitments include car payments, child support, alimony, student loans and credit card debt. Your debt payments should be no more than 36 percent of your gross income for conventional lenders, or 41 percent for government-backed mortgages. This ratio can supersede the number obtained from the housing-to-income ratio. For example, if your other debt commitments require 15 percent of your monthly income, this ratio would limit your mortgage to 21 percent of your income with a conventional lender.
  
  

Loan to Value

• The loan-to-value ratio considers the mortgage amount in comparison to the fair market value of the home. The larger your down payment is, the smaller your loan-to-value ratio will be. Lenders generally prefer that the mortgage be no more than 80 percent of the home's value. If the mortgage amount is higher, lenders require private mortgage insurance or a second mortgage, sometimes called a piggyback loan, for the amount over 80 percent. The loan-to-value ratio is especially relevant when refinancing a mortgage, because your house value might have changed, or you could be looking to get a cash-out refinance to consolidate other debts or pay for home improvements.
  
  

Other Factors in Approval

• Banks look at a few other factors besides ratios when considering your mortgage application. One of the major factors is your credit score. The lower your score, the less likely your application is to be approved. Plus, people with low credit scores who are approved have to pay higher interest rates than people who have better credit scores. Boost your credit score by paying bills on time and decreasing the amount of credit card debt you carry. Lenders also consider your stability, especially with regard to how long you have been in your current job and your current home.