When determining your maximum mortgage, lenders use what is known as a debt to income ration. A debt to income ration is calculated by taking your monthly income and comparing it to you how much you can pay your monthly debt. Your debt to income will be presented to you like this: 30/35. These are your front and back ratios.

Your front ratio is the percentage of your monthly income that can be used to pay for you housing costs. These include your mortgage payments, insurance, property taxes, and various other costs associated with owning a home.

Your back ratio is very similar to your front ration. However, unlike the front ratio, your back ratio also takes into account other factors, such as credit card debt, car payments, loan payments, and other expenses.

When analyzing your debt to income ratio, it is good to remember that the ideal front and back ratio is 33/38. When a lender sees this they will see that 33% of your monthly income is used to pay for housing. When other expenses are taken into account, a lender will see that 38% of your total monthly income is spent on housing costs as well as other debts.

Now for an example. If your monthly income is $10000 and the ideal debt to income ratio is 33/38, you monthly housing payments should be $3300, 33% of your total monthly income, and your total debt payments will be 38% of your monthly income, or around $3800.

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After you have applied for your loan, it is placed in a loan pool with many of other peoples’ loans as well. These loan pools are then purchased by various firms, such as the Fannie May Foundation. The mortgage pool is then split into smaller ownership segments, which are known as mortgage backed securities. These securities do not necessarily have to do with your loan specifically, but rather a whole segment of loans which your loan falls into. This makes at a very safe and secure investment idea.

These securities are sold on Wall Street to anyone looking for a reasonably stable investment at a higher interest rate than bonds or other securities. Selling these securities institutes are able to acquire the money necessary to purchase new loan segments and allow lenders to earn more money and lend to more borrowers.

Your loan payments are sent to your loan servicer, who only is able to keep a tiny part of your payment before it is given back to investors. Investors then give the payment to investors who have invested in these mortgage securities.

The purchasing and selling of your mortgage and mortgage securities is known as mortgage banking and this makes up a large majority of the mortgage industry.

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