Tuesday, July 9, 2013
Debt-To-Income (DTI): What It Is And Why It's Important For Mortgage Qualifying
By William Apple
Your debt-to-income ratio (DTI) is probably among the most crucial considerations for a mortgage bank because it signifies your financial ability to repay a mortgage. A high DTI will usually mean more risk for the mortgage lender, a smaller DTI means less risk.
What is DTI?
Your debt-to-income ratio is basically the proportion of your monthly income that services debt liabilities (auto loans, bank cards, personal lines of credit, etc.) as well as housing expenses (home loan payments, including taxes and insurance, HOA fees, rent payments, etc.).
If your DTI is high, it implies you have very little additional cash to manage unexpected expenditures while keeping up with your mortgage payments. This represents more risk for the lender. On the other hand, if your DTI is low, you have sufficient additional cash flow every month to easily make your payments and cover the inevitable unplanned expense.
The highest debt-to-income ratio permitted right now is 50% for FHA loans and 45% for conventional mortgages.This means that, for a conventional loan, a maximum of 45% of your monthly qualifying income can be devoted to debt service and housing expenses. The maximum allowed under FHA guidelines is 50%. The rules for FHA and conventional home loans do sometimes allow for higher DTIs, but only on a limited basis coupled with compensating factors like high credit scores, substantial financial assets, low loan-to-value, and so forth.
When you're working with your lender, you might hear the phrases "front end" and "back end" DTI come up. Your "front end" DTI is the percentage of your earnings that pays just your house payment, including property taxes, property insurance, mortgage insurance, as well as any HOA expenses. "Back end" DTI includes all property and financial debt expenditures.
These days, front end DTI is not as significant a consideration as it once was, however it still does come up once in a while. Most lenders today are concerned primarily with your back end DTI.
Calculating Debt-to-Income
To calculate DTI, basically divide your overall monthly financial debt expenses as well as rent or house payments (including taxes, insurance, mortgage insurance, and HOA fees) by your pretax monthly income, as follows:
1) Get yourself a copy of your credit file or collect your most current statements for all your debt obligations. Note that only debt obligations are a part of your DTI, not utility, phone, or cable bills.
2) Tally up all payments for all debts except for your mortgage or rent for the time being. Make sure to include car loans, credit cards (use only the minimum payment), credit lines, student loans, as well as any other debt obligations that you have.
3) Now add to your running total your monthly rent payments or mortgage payment, including taxes, insurance, any mortgage insurance or PMI, and HOA expenses.
4) Divide the sum by the gross monthly income, then multiply by 100 to obtain your DTI percentage.
If you're looking to buy a home or refinance your present mortgage and want to figure out your DTI for the new mortgage, substitute your current rent or house payment (including all taxes, insurance, mortgage insurance, and HOA fees) for the new projected house payment.
What is DTI?
Your debt-to-income ratio is basically the proportion of your monthly income that services debt liabilities (auto loans, bank cards, personal lines of credit, etc.) as well as housing expenses (home loan payments, including taxes and insurance, HOA fees, rent payments, etc.).
If your DTI is high, it implies you have very little additional cash to manage unexpected expenditures while keeping up with your mortgage payments. This represents more risk for the lender. On the other hand, if your DTI is low, you have sufficient additional cash flow every month to easily make your payments and cover the inevitable unplanned expense.
The highest debt-to-income ratio permitted right now is 50% for FHA loans and 45% for conventional mortgages.This means that, for a conventional loan, a maximum of 45% of your monthly qualifying income can be devoted to debt service and housing expenses. The maximum allowed under FHA guidelines is 50%. The rules for FHA and conventional home loans do sometimes allow for higher DTIs, but only on a limited basis coupled with compensating factors like high credit scores, substantial financial assets, low loan-to-value, and so forth.
When you're working with your lender, you might hear the phrases "front end" and "back end" DTI come up. Your "front end" DTI is the percentage of your earnings that pays just your house payment, including property taxes, property insurance, mortgage insurance, as well as any HOA expenses. "Back end" DTI includes all property and financial debt expenditures.
These days, front end DTI is not as significant a consideration as it once was, however it still does come up once in a while. Most lenders today are concerned primarily with your back end DTI.
Calculating Debt-to-Income
To calculate DTI, basically divide your overall monthly financial debt expenses as well as rent or house payments (including taxes, insurance, mortgage insurance, and HOA fees) by your pretax monthly income, as follows:
1) Get yourself a copy of your credit file or collect your most current statements for all your debt obligations. Note that only debt obligations are a part of your DTI, not utility, phone, or cable bills.
2) Tally up all payments for all debts except for your mortgage or rent for the time being. Make sure to include car loans, credit cards (use only the minimum payment), credit lines, student loans, as well as any other debt obligations that you have.
3) Now add to your running total your monthly rent payments or mortgage payment, including taxes, insurance, any mortgage insurance or PMI, and HOA expenses.
4) Divide the sum by the gross monthly income, then multiply by 100 to obtain your DTI percentage.
If you're looking to buy a home or refinance your present mortgage and want to figure out your DTI for the new mortgage, substitute your current rent or house payment (including all taxes, insurance, mortgage insurance, and HOA fees) for the new projected house payment.
Posted by AppleFanatic at 2:51 AM
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