How to Quickly Calculate Your Debt to Income Ratio (DTI)

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Debt to Income Ratio (DTI)

The debt-to-income (DTI) ratio is an important component of the mortgage application process. It’s a way for lenders to get a better understanding of your ability to pay back the loan you’ve applied for. Your DTI ratio is calculated by dividing your total monthly debt payments, including any proposed mortgage, by your gross monthly income. Most lenders look at the two types of DTI ratios – front-end and back-end – when they review a loan application.

When including monthly payments on any mortgages you currently have, make sure to include the amounts due for property taxes, insurance (including flood insurance), mortgage insurance (if applicable), and HOA fees.

Same with the proposed mortgage. Make sure to include the mortgage payment plus property taxes, all insurance, and any HOA fees.

For the other debt payments, use the minimum monthly payments due as shown on the most recent credit report. If paying off any accounts prior to (or at closing) make that information known to your mortgage professional so they can remove those monthly payments from your DTI ratios.

Same with any new credit that you’ve applied for or expect to apply for prior to your loan closing…those items must be disclosed.

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Disclose all Debts

Important: If there are any payments that don’t show on your credit report (for example: child support) make sure to disclose these to your lender. Non-disclosure of known payments that exist or that you know will exist can be considered mortgage fraud. Always disclose even if disclosing could cause loan denial, for your own protection.

Front-end ratio: This is also known as the top portion or housing expense ratio. The front-end ratio looks specifically at how much of your gross monthly income would be dedicated to paying off your new mortgage if it were approved. Generally, lenders will look for a front-end ratio of no more than 28%.

Back-end ratio: The back-end ratio takes into account all of your existing debt obligations, including your new mortgage payment, when determining how much you can afford to pay. It is calculated by adding up all of your monthly payments and dividing that number by your gross monthly income.

Total ratios of up to 50% can be acceptable for conforming loans (Fannie Mae/Freddie Mac), subject to other conditions such as credit score, property classification, whether you own other homes, and other factors.

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FHA and VA Debt-to-Income (DTI) Ratios

FHA loans can go higher than 50% (subject to other factors).

VA loans don’t have a defined maximum DTI, however, if DTI is over 41%, then expect more loan underwriting scrutiny.

Debt-to-Income (DTI) isn’t the only factor lenders look at when evaluating an application. Your FICO credit score and credit/employment history/liquid reserves are also key factors in determining if you’ll qualify for mortgage loan approval.

If a first-time home buyer, there are several loan programs for you to consider that are geared toward first-time homebuyers. Some offer rate incentives and lower-cost mortgage insurance which can assist in lowering your debt-to-income (DTI) ratios for approval.

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Creative (and Acceptable) Ways to Calculate Debt-to-Income Ratios for Mortgage Approval

It could be worth considering a smaller down payment than planned and instead using those funds to pay off or lower revolving credit (credit card) debt in order to assist with lowering the Debt-to-income ratios for your mortgage approval. Talk with your financial advisor and mortgage professional to review your options.

Overall, debt-to-income ratios are an important factor in obtaining a mortgage loan. By understanding how they’re calculated and taking steps to improve them, you can increase your chances of having your loan application approved. It’s also important to remember that lenders look at other factors when evaluating a loan application, such as credit score and employment history. By taking care of all these components, you can increase the likelihood of obtaining a mortgage loan and purchasing the home you want.

Calculating your debt-to-income ratio along with any options to improve the ratio can increase your chances of having your mortgage application approved.

Contact Steve Silver at Silver Mortgage, at 1-800-920-5720.

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