Two ratios, not one
Underwriting looks at two numbers, both expressed against your gross monthly income — before tax, before deductions, before anything.
- Front-end ratio, sometimes called the housing ratio: the proposed housing payment divided by gross monthly income. The housing payment is not just the mortgage. It is principal, interest, property taxes, homeowner's insurance, mortgage insurance where it applies, and any HOA or condominium dues — the whole thing, usually shortened to PITI.
- Back-end ratio: the same housing payment plus every other monthly debt obligation reported on your credit, divided by the same income. This is the number that usually decides the file.
Conventional loans commonly cap the back-end ratio around 45%, with automated underwriting sometimes going higher when reserves, credit and equity are strong. FHA files can reach the region of 50% with compensating factors. VA works differently again, using a residual-income test alongside a ratio guideline nearer 41%. These are guidelines, not statutes, and individual lenders add their own stricter overlays on top.
What counts as a monthly debt
The rule of thumb is: whatever a creditor reports as a required monthly payment. In practice that means:
- Credit cards and lines of credit — the minimum payment shown on the credit report, not what you actually pay. Paying $600 a month against a card with a $180 minimum does not help your ratio at all.
- Car loans and leases — the full payment, for the whole remaining term. Leases are counted even when the lease is nearly over, because a replacement vehicle is assumed.
- Student loans — and this is where files most often go wrong. Programmes differ on deferred and income-driven loans. Some accept the documented income-driven payment even when it is $0; others impute a percentage of the balance, commonly 0.5% or 1%. A $60,000 student loan balance can appear as either $0 or $600 depending on the programme, which is a swing big enough to change the answer entirely.
- Personal and instalment loans — the contractual payment.
- Court-ordered obligations — child support, alimony, garnishments. These do not appear on a credit report but they do count.
- Co-signed debt — counted against you unless you can document that someone else has made the payments for the last twelve months.
What does not count
- Living expenses. Utilities, mobile phone, insurance premiums other than the property's, groceries, childcare, transport. None of it appears in the ratio, which is why a technically qualifying payment can still be unaffordable in your actual life.
- Instalment loans with ten or fewer payments remaining — commonly excluded on conventional files, provided the payment is not large relative to income. Worth checking before you clear one: you may be buying something you already had.
- Accounts paid in full and closed before the file is finalised, with documentation.
- Business debt paid by a business, with twelve months of cancelled cheques or statements showing the business made the payments.
- Authorised-user accounts in many cases, if you can show the primary account holder makes the payments.
Balances never appear anywhere
This is the point most guidance buries, and it is the reason "pay off the highest interest rate first" is the wrong instruction when the goal is an approval.
The ratio contains payments. It does not contain balances, and it does not contain interest rates. A $4,100 car loan with a $500 payment damages your borrowing power more than a $9,000 credit card with a $180 minimum, even though the card costs you far more to carry and has more than twice the balance.
The consequence is a simple efficiency test: cash required, divided by the monthly payment removed. Ranked that way, small instalment loans are almost always the best value and large card balances are almost always the worst. The payoff optimiser does exactly this sort, and prices adding the money to the down payment on the same scale for comparison.
There is one subtlety. A partial payment on a credit card does reduce the minimum, because card minimums are typically 1% to 3% of the balance with a floor. A partial payment on an instalment loan reduces nothing at all — the note's payment is fixed until the balance reaches zero.
Income is not always what you think either
Salaried income is the easy case: the gross figure on the pay stub. Beyond that it gets conservative fast. Bonus, overtime and commission generally need a two-year history and are averaged. Self-employment income is taken from tax returns after business deductions, which is how someone who banks $9,000 a month can qualify on $4,000. Rental income is usually counted at about 75% of gross to allow for vacancy. Part-time income normally needs two years.
The practical implication: raising the denominator is slow and paperwork-heavy, while lowering the numerator can be done this month with cash you already have. That asymmetry is why payoff ordering matters so much.
Timing, and the mistakes made in the last month
Creditors report monthly, so a payoff can take a full cycle to appear. Keep the payoff letter or a zero-balance statement — a lender can usually use that document directly rather than waiting for the bureau.
Three things to avoid between application and closing:
- Opening anything new. A car loan taken out during underwriting is the classic way to lose an approval, and furniture financed "with no payments until next year" still reports a payment.
- Draining your reserves. Underwriting frequently wants to see some months of housing payments left in the bank after closing. Fixing the ratio and failing the reserves test is a real outcome, and a bad trade.
- Moving money you cannot source. Large deposits have to be explained and documented. A gift needs a letter; cash needs a history.
Closing a paid-off account is also worth resisting until after you close on the house. It shortens your average account age and narrows your credit mix, which can move the score at exactly the wrong moment. Pay it off, leave it open, and change nothing else.
General description of standard agency underwriting practice for United States residential mortgages. Guidelines are set by the agencies and investors, change over time, and are further restricted by individual lender overlays. Your loan officer's automated underwriting result is the only answer that binds. Not mortgage, lending or financial advice.