Common Joe 'n Jane Real Estate Wiki

Real estate exam prep made easy! Dive into our wiki for key concepts and study materials tailored for success in your exams.

<--Back to Wiki Home

# Define Income Ratio in Real Estate

## Income Ratio:

The income ratio is a financial measurement that compares how much money you earn to how much money you spend on certain expenses like housing or debt payments. It is calculated by dividing your monthly income by your monthly expenses for that specific category. This helps determine if you can afford to take on new debt or expenses, like a mortgage.

## Formula:

Income Ratio = Monthly Expenses / Monthly Income

## Example:

Let's say your monthly income is \$3,000 and your monthly expenses for housing are \$1,200. To calculate your income ratio for housing, you would divide \$1,200 by \$3,000, which equals 0.4 or 40%. This means that 40% of your income goes towards housing expenses.

"A Deep Dive for Real Estate Agents"

When it comes to buying a house, lenders typically look at two main income ratios: the front-end ratio and the back-end ratio.

The front-end ratio is the percentage of your monthly income that goes towards your housing expenses, such as your mortgage payment, property taxes, and insurance. Lenders generally prefer a front-end ratio of no more than 28% to 31%, meaning that your housing expenses should not exceed 28% to 31% of your monthly income.

The back-end ratio, also known as the debt-to-income ratio, is the percentage of your monthly income that goes towards all of your debt payments, including your housing expenses, credit card payments, car loans, and student loans. Lenders typically prefer a back-end ratio of no more than 36%, meaning that your total debt payments should not exceed 36% of your monthly income.

However, these are just general guidelines and the ideal ratios may vary depending on the lender and the type of loan you are applying for. It's important to speak with a lender and get pre-approved for a mortgage to determine what ratios you can qualify for based on your unique financial situation.

"Wit & Whimsy with the Dumb Ox: Unlocking Knowledge with Rhyme:"

Oh, the income ratio, it's quite a thing!
It compares how much you make to what you spend with a ring.
Take your income each month, and divide it you see,
By what you spend on things like rent, that's the key.
If the number you get is quite high,
You may need to tighten your belt and say goodbye,
To taking on new expenses, like a big mortgage loan,
Until your income ratio has grown!