In this episode of Fast Mortgage Insight, we broadly cover the very deep subject of Debt-to-Income Ratio (DTI). There are a few key factors that lenders consider when making a mortgage lending. Your Debt to Income Ratio is one of the most important factors that lenders use to determine mortgage eligibility.
- What is "Debt to Income Ratio"
Let’s start with the basics. Debt to income ratio is a percentage that expresses how much of your income is taken up by your housing expenses, which include your mortgage payment property taxes, and insurance, and most expenses being reported by creditors to the credit bureaus. As well as child support, alimony, and IRS debt.
- Co-signed debts
If you are a co-signer for a debt that is showing up on your credit meaning you are liable, but you don’t pay the debt monthly, someone else pays it. You don’t have to factor that payment into your debt-to-income ratio if you can prove that someone other than you, has been paying the debt for the last 12 months. Remember paper trail is very important, you can’t have someone giving you cash. So, they’re paying directly from their accounts, or they need to write you a check, send you a Zelle, Venmo, etc. It needs to be a traceable transaction.
- Car leases
If you’re leasing a car and only have 5 payments left, they will still count that towards your monthly liabilities unless you have another car, because they’ll assume you still need some form of transportation so it’s likely you’ll renew a lease or have to take over the loan.
- Credit cards and charge cards
Credit cards use your minimum payment due. Keep in mind that if you have a charge card like American Express where whatever you charge throughout the month the balance is due at the end of the month. Lenders will have to use your balance owed as your monthly minimum payment. Ways to exclude them from your debt-to-income ratio is you pay it off, they will ask to source the funds used to pay the debt or they’ll want to see a bank statement showing that you have enough funds in reserves to pay the balance at the end of the month. If you are doing a cash-out refinance
- Student Loans
If your loans are in deferment or forbearance, they will calculate your payment based on 1% of the balance. Likewise, if you’re on a ZERO Dollar income-driven repayment plan.
Income is a topic in its own right but I’ll go over a couple of things that are important to take into consideration. Lenders are looking for at least two years of continuous income. If you are receiving social security that is tax-free, the lender may gross up what you received up to 125%. The lender will use 75% of your rental income in most cases and if you are receiving IRA disbursements or annuities the lender will want to see a 3-year continuance. Stay tuned for future videos. I’ll make sure to cover income more in-depth.
- Calculating your Debt to Income Ratio
Now that you have all of the obligations that get factored into your DTI, all you have to do is divide it by your total gross monthly income. Again, that is before taxes. For conventional Mortgages on primary homes, you want to be under 50%. Or investment properties, you want to keep that percentage under 45%. For FHA mortgages you want to keep your debt to income ratio under 46%. For VA mortgages you want that percentage under 60%
Like always don't be afraid to reach out with any questions or scenarios i did not cover in this video.