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Debt to Income Ratio

There are many things to debt to income ratios that people do not quite understand. As lender guidelines constantly change and how different things are calculated, it can sometimes be hard to keep up with all of the new laws, guidelines and regulations. Some important things to know about debt to income ratio are:

  • Student loans are still accounted for in debt to income ratios even if they are in a forbearance or deferred status. Normally a 5% payment will be used for debt to income ratio calculations if no payment amount is reporting to the credit report.
  • Co-signed vehicles or loans are normally counted against you for debt to income ratio purposes. If you can show a satisfactory 12 month payment history by the other party that was co-signed for, with proof that all payments were made by the other person, you may be able to have this co-signed loan taken out of your debt to income ratio calculations.
  • If you have a credit card with no minimum payment reporting to your credit report, such as an AMEX card, then 5% of your balance will be used as a minimum payment for that liability.
  • Property taxes, homeowners insurance, PMI (Private Mortgage Insurance), homeowners association dues, and flood insurance are all added into your monthly debt for calculating debt to income ratio.
  • Utility payments (for gas, electric, water, etc...) are not calculated in debt to income ratios
  • Investment accounts are not calculated into debt to income ratios.

A Debt to Income Ratio is the percentage of monthly income compared to monthly debt. To figure out ones debt to income ratio you will take a 12 month total of income (a W2 from work is perfect for this) and divide the total by 12 months and this will give you your average monthly income. Next you will add up all of your current monthly expense payments (such as cars, credit cards, house payments {including property taxes, homeowners insurance, homeowners association fees if applicable}, alimony or child support you are required to pay, personal loans, etc...) and then divide the monthly income by the total monthly expenses. This is a simplistic approach to calculate your approximate debt ratio.
Example: $36,000 yearly income / 12 months = $3,000 monthly income
Total monthly bills = $1300 per month / $3,000 monthly income = $43.33% debt to income ratio

In mortgage related documents, Debt-to-Income Ratios are often expressed as two sets of two digit numbers separated by a slash. For instance, 28/36, where 28 is percentage of the "front DTI", or proposed housing expenses in relation to the applicant's income, and 36 is the percentage of the "back DTI", or total debt divided by income.

If you have a particular liability like a car loan or a student loan with 10 or less remaining payments then lenders will generally allow you to exclude that payment from your debt to income ratio.

Lenders look at both your front end ratio and your back end ratio. The front end ratio is calculated by taking the sum of your mortgage payment, property taxes, and homeowners insurance, and dividing that total by your gross monthly income. The back end ratio includes all of your other monthly obligations such as credit cards, car payments, personal loans, etc.

It is important to remember, when figuring your Debt to Income (DTI) while considering a debt consolidation/refinance, to remove any credit card payments from the equation, if they are to be paid off through the new loan.

Your debt to income ratio is the main factor that a lender uses to determine how much of a home loan mortgage payment and home that you qualify for. By calculating your debt ratio before your mortgage payment you can figure out how much money your monthly mortgage payment can be based on the lenders debt to income ratio guidelines and you income. Consult your Ohio mortgage consultant to find out exactly how much of a home you will qualify for based on your debt to income ratio, also known as DTI.

You can reduce your debt to income by paying off your credit cards at closing. The lender will not include these debts in your dti if they are going to be paid at closing.

Bills such as groceries, cell phone and everyday living expenses are not figured into DTI. Keep this in mind when deciding on a comfortable house payment for your budget.

If you do not qualify for a loan because your DTI is too high there are a couple options you have available. You can either try to increase your monthly income, or decrease your expenses. If you have some additional income that is hard to document, such as a part time cash job, or rental income, etc. that you did not include talk to your mortgage professional they may be able to use that income to help qualify you. You may also be able to decrease your expenses by paying off the remainder of a car loan, personal loan, or credit card that has a high payment. Another alternative is to consider some alternative types of mortgages that have lower payments such as Interest Only, ARMs, 40 year terms, or a Pay Option ARM

Your debt to income ratio (DTI) is a key indicator of your true financial picture. It is definitely the lending industry's measure of fiscal health. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food, entertainment) by monthly gross income.

Your debt-to-income ratio, also referred to as a "back end" ratio, is a major factor considered for mortgages, auto loans, and other large purchases. If your ratio is too high, you won't qualify for even high interest loans.

Getting out of debt and staying out of debt is simple. All it takes is spending less than you earn, but although the solution is simple, putting it into practice is hard for many people.


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