How Lenders Measure Your Home Buying Power
Before shopping for a home, you must understand how financial institutions evaluate your borrowing capacity. Lenders rely on strict debt-to-income (DTI) ratios to determine the maximum loan amount they will approve.
DTI ratios are split into two categories: front-end ratio and back-end ratio. The front-end ratio represents the percentage of your gross monthly income dedicated strictly to housing expenses (PITI + HOA). The back-end ratio includes housing costs plus all recurring monthly debts (credit cards, student loans, auto payments, child support).
Lenders traditionally apply the "28/36 rule," where housing costs should not exceed 28% of gross monthly income, and total debts should not exceed 36% of gross monthly income. Some loan programs allow higher limits (up to 45% or 50% for FHA/VA loans) depending on compensating factors such as cash reserves or high credit scores.