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Hong KongDebt-to-income ratios explained
The housing ratio is the proposed housing payment over gross monthly income. The total debt ratio adds every other monthly obligation. Conventional benchmarks are 28 and 36 percent; FHA benchmarks are 31 and 43.
Two ratios, one income figure, and a short list of what belongs in each numerator.
The housing ratio
The proposed housing payment divided by gross monthly income.
The housing payment is PITI - principal, interest, taxes and insurance - plus homeowners association dues and any mortgage insurance.
The total debt ratio
All monthly obligations divided by gross monthly income. That includes the housing payment plus every other recurring debt.
- Car payments
- Student loan payments
- Minimum credit card payments
- Alimony and child support
- Other instalment obligations
Not included: utilities, groceries, phone bills, insurance that is not part of the housing payment. Those are living costs, not debts.
Gross, always
Both ratios use gross monthly income, before tax.
Using take-home pay produces a higher, plausible, wrong answer. That is precisely why it is offered as an option.
28 and 36 percent for conventional. 31 and 43 percent for FHA. Questions often ask whether a borrower clears one program and not the other, so learn them as pairs rather than as four separate numbers.
Compensating factors
Benchmarks are not absolute cut-offs. Substantial reserves, a long stable employment history, a large down payment or minimal payment shock can support a higher ratio. Gross, not net.
The exam asks for the benchmarks. It also asks what a compensating factor is, so know both.
Common questions
What is the front-end ratio?
The proposed housing payment divided by gross monthly income.
What is the back-end ratio?
All monthly obligations, including housing, divided by gross monthly income.
What counts in the back-end ratio?
Car payments, student loans, minimum credit card payments, alimony and child support. Not utilities or groceries.
What are the benchmark ratios?
28 and 36 percent for conventional lending, 31 and 43 percent for FHA.
Do ratios use gross or net income?
Gross, before tax. Using take-home pay is the classic wrong answer.