When you have decided the time has come for you to look into buying a home for you and your family, there are a few things you need to understand about the aspects of how financial institutions come to the decision on who they grant a loan to. The following are a few terms and how they are used to come up with to determine if a borrower qualifies for certain mortgages.

Front end ratio - determines what portion of a persons income is used to make mortgage payments. It is calculated by using the persons monthly housing expenses divided by his/her monthly gross income and expressed as a percentage. Lenders use the front-end ratio in combination with the back end ratio to approve mortgages. Typical monthly housing expenses include mortgage principal, interest, taxes and insurance payments- known as a whole to be PITI.Typically, your front end ratio should be no higher than 28% of your monthly gross income.

Back end ratio - a ratio that indicates how much of a person's monthly income goes towards paying debts. Includes calculations for PITI, credit card payments, child support and any other loan payments. It is also known as "debt-to-income" ratioGenerally lenders like to see a back end ratio that is no greater than 36%, however there are lenders who make allowances for up to 50% if you have good credit. (Be wary of any lender who is willing to lend you such a high percentage of your income. These scenarios are how people can get into financial trouble if they're not careful.)

Some lenders consider only this ratio when approving mortgages, instead of using it in combination with the front end ratio. To an average potential home buyer, all of this can seem a little overwhelming and almost like a second language. If you have a reliable mortgage company helping you along the way, they can explain things to you so you can understand how the process works.

A front end ratio is primarily used for the lender to see how much you can afford every month for a mortgage. If you have an income of $3000 a month, and the set front-end ratio for an FHA loan is 31%, that means you must be able to pay $930 a month. If you are going for a conforming conventional loan at a rate of 33% you would have a mortgage payment of $990 a month. The lender than takes into consideration your back end ratio. For these calculations you are looking at 43% for an FHA loan, and 45% for a conforming conventional loan.

For example: If you have a car payment of $200, and you pay $100 a month for a credit card, your total monthly recurring debt is $300. For the FHA loan, you add the $930 from the front end ratio calculations plus the $300 recurring debt and your total is $1230.The back end ratio is $1290($3000 x 43%= $1290) Since your total debt is $1230 and lower than the $1290 you would qualify. For a conforming conventional loan $3000 X 45% = $1350 so therefore in this instance you would not qualify for a conforming conventional loan and would have to see what other option are available or just go with the FHA if it is offered.

Determining how expensive of a house you would qualify for can be based on anywhere from two to six times your annual salary. You also need to keep in mind the interest rates you will locking into, these can often mean a big decrease in the amount you will be able to borrow.

Before buying a home in Boulder Colorado or Longmont Colorado, be sure to ask your Realtor for a recommendation of a good lender. Your lender can help you better understand all of these concepts and find the right loan for your needs.