June 2012


In a recent article I wrote on BiggerPockets.com concerning partnerships, I mentioned knowing the difference between “front-end” and “back-end” debt-to-income.  Today I want to briefly discuss what that is, and why it is important for a real estate investor, or just a casual homeowner, to know.

What is Debt-to-Income?

“Debt-to-Income” is a ratio, used by banks and other financial institutions, to determine how much credit you are using compared to how much income you make.

Why does this matter?

Because income is deceptive.

Let’s say you make $10,000 per month in income (we’re just pretending…).  Could you afford a car payment that is going to cost you $500 per month? You probably want to quickly respond with “yes, of course” but like I said, income is deceptive. If your $10,000 income is eaten up with a $9600 house payment – you couldn’t do it.  Banks are smart (okay, that’s debatable) and they understand this.  This is where the debt-to-income ratio comes into play.

Your debt-to-income is the total amount of minimum payments you make on your debt divided by the total income you make in a month.

For those who love math (guilty!) here is how the equation looks:

Debt to Income = Debt Payments / Monthly Gross Income.

So, if your gross income (before deductions) is $10,000 each month and your minimum debt payments are $3500 per month, then your debt-to-income ratio is 35%.

A bank does not want you to be “over leveraged,” because it increases your risk of not paying back the loan. The more debt you have, the higher chance the bank has of losing money.

What is “Front-End” and “Back-End” Debt-T0-Income?

“Front-end” debt-to-income uses the formula above and simply looks at the debt related to the mortgage – including property taxes and insurance. For example, if your mortgage payment (with taxes and insurance) is $1500 per month and your income is $10,000 per month, your front-end debt-to-income ratio is 15%.

“Back-end” debt-to-income, on the other hand, uses the above formula to determine your ratio, but includes the minimum monthly payment on all your debt, including credit cards, student loans, mortgage (with property taxes and insurance), auto loans, and any other debt that might show up on your credit report (including loans you might have co-signed for that are not even yours). So, if your credit report shows that you have $3000 per month in minimum monthly payments plus your $1500 mortgage payment all on your $10,000 monthly income, your back-end debt-to-income will be 45% ($3000+$1500 / $10,000).

Why Does Debt-to-Income Even Matter?

Debt-to-income is important because you want to qualify for a mortgage.  

You cannot qualify for a mortgage with a bad debt-to-income ratio.  Lenders will require you to fit below their maximum standard for debt-to-income in order to qualify. If your debt to income is too high – your application won’t even be looked at. You will be shot down automatically by the computers who first process your loan.

Even if right now you aren’t looking around for a loan, you will eventually. At that point, you need to make sure you debt-to-income is in good standing.

What is a Good Debt-to-Income Ratio?

While every bank has their own standards (and can often slightly bend them if you qualify in every other way), generally a bank would prefer:

  • Your front-end ratio be less than 30%.   AND
  • Your back-end ratio be less than 40%.

This is often written with a hyphen, such as 30/40.

Keep in mind, a bank will usually want BOTH ratios to be correct in order to qualify.

So, going back to our story of you earning a $10,000 income – your front-end debt-to-income ratio would allow you to purchase a home that cost you $3000 per month (including property taxes and insurance).  Your back-end debt-to-income would allow all of your total monthly debt payments – including the loan you are trying to get – to be less than $4,000 per month.
Obviously, if you are trying to get a mortgage you may have other qualifications to pass before getting a loan,  but by making sure you at least fit within the debt-to-income ratio you are one step closer to hearing the banker say “Yes!”

Photo from s_falkow

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.


This is a post (the second in a three-part series) by John Fedro of MobileHomeInvesting.net

In my last post here at RealEstateInYourTwenties.com, I introduced myself, teased you with my simple cash-flow generating secret tool, then KAPOW!! – completely threw you a curve-ball by divulging my money-making strategy is investing in small, individual, easy-to-close mobile homes in and out of mobile home parks. I need to be brutally honest with you for the next minute…

Before we get into the meat of a cash-flow deal (next post) and talk about where all our money is made, you have to understand why sellers will sell you their unwanted mobile homes for such low prices; and conversely, why buyers will pay over retail prices for the same mobile homes. Much like any j.o.b. – you must understand your product, market, and all the players before you may truly thrive.

1. Understand Your Target Homes:

The mobile homes that will make you the most money are often times not the ones you would first believe. In a nutshell 3 bedrooms almost always outsell 2 bedrooms, and clean mobile homes always outsell mobile homes that need repairs. But what else… If you have been in real estate for any length of time you understand that it is not the cleanest or largest homes that make the most money but it is the more motivated sellers that you are truly after. The more motivated the seller, often times the more lucrative the deals end up becoming.

2. Understanding Your Buyers:

Approximately 80% of your end-buyers that call from your “Mobile Home For Sale” advertisements will not have the cash or approved credit to pay you all-cash for your mobile home. Another way to say this is that most mobile home buyers can make you a move-in payment and monthly payments for the sales price of the home. Understand that there is an ocean of buyers looking to buy a home with monthly payments instead of paying with all-cash.

What about buyers with all cash? These buyers are out there but in far less supply than buyers with some cash and great job history. Go where the demand is… payment buyers.

What about bank financing? Bank financing is very hard and restrictive to obtain especially concerning mobile homes on rented land such as inside a mobile home park.

There is a large segment of American society that are credit-conscious, hard-working and honest folks that would love to stop renting and finally own a mobile home of their own. If you choose to sell a home for all cash you are competing with all other sellers looking to sell their properties for all cash; driving home prices lower and lower. If you choose to accept monthly payments for your mobile home you can likely find tenant-buyers eager to pay over retail price for the value/opportunity to own a beautiful home.

3. Understanding Your Sellers:

My real estate investing business changed forever when I began to see my sellers for what they really are; fragile, scared, vulnerable, friendly, and selfish human beings. Let’s step outside the relationship that we typically have with mobile home and traditional real estate sellers and realize that each is a unique soul with his or her own set of skills, ambitions, loves, fears, and wants.

So what does all this mean for you: In a nutshell sellers are real people in real situations. Some sellers need to sell today, and others can wait weeks, months, or even years before becoming desperate to sell. Again some sellers are at the end of their ropes, while others have enough savings/income to ride out whatever situation is requiring/pushing them to sell. By being a mobile home investor in your area you may close deals and generate cash-flow by knowing your market and knowing what buyers will pay.

In my next post here at Realestateinyourtwenties.com you will discover an simple method to help ensure you underpay for every mobile home you purchase.


Impact a life daily,

John Fedro


P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.