Debt-to-Income (DTI) is one of the many new mortgage related terms many First-Time Home Buyers will get use to hearing.
DTI is a component of the mortgage approval process that measures a borrower’s Gross Monthly Income compared to their credit payments and other monthly liabilities.
Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs. The debt is pulled off of the credit report so anything not listed there such as insurance payments, utility payments, etc will not be considered however any installment debts, credit cards, etc will be taken into account.
There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.
Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.
You should note that with FHA and automated underwriting approval you might be able to maintain a debt ratio up to 55%.
Under the FHA loan program a manual approval is available however the 43/31% ratios will apply. Also you will need to plan to provide verification of your current housing payment. If you are renting most likely you will need to provide cancelled checks to prove your rental history.
Two Types Of DTI Ratios:
a) Front End or Housing Ratio:
- Should be 28-31% of your gross income
- Divide the estimated monthly mortgage payment by the gross monthly income
b) Back End or Total Debt Ratio:
- Should be less than 43% of your gross monthly income
- Divide the estimated house payment plus all consumer debt by the gross monthly income
Remember, the DTI Ratios are based on gross income before taxes. Lenders also prefer to use W2’s or tax returns to verify income and employment.
However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs. Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.
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Related Articles – Mortgage Approval Process:
- Basic Mortgage Terms
- How Much Can I Afford?
- Common Documents Required For A Mortgage Pre-Approval
- Top 8 Questions To Ask Your Lender During Application Process
- What’s The Difference Between An Investment Property, Second Home and Primary Residence?
- Seven Items Real Estate Agents Need To Know About Your Mortgage Approval