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Debt Ratios

Your debt to income ratio, also know as DTI, is calculated by adding your total monthly income, adding your total monthly liabilities, and then dividing the two numbers. This will provide you with your monthly Debt to income ratio.

Lenders will also use the fully indexed mortgage payment including taxes and insurance to determine the DTI. This means loans with small initial start rates, are not any easier to qualify for due to the small initial payment.

If your student loan payments are deferred but are still required to be calculated in your debt to income ration, be sure to obtain a copy of the original student loan documents. With the principle, interest rate, and term, your loan professional can determine a payment that may be much less than the lenders estimates.

If your debt ratio is to high, there are stated income programs available to you. With a stated income program we will simply state what your income is, and it will not be verified via pay-stubs and tax returns. Remember that just because there are things that you can do to avoid debt ratio problems, you still need to be comfortable with your monthly payments.

Your debt to income ratio is used, in part, to determine how much money you can afford to borrow. Generally lenders want to see a debt to income ratio of 45% or less, although some loan programs allow you to go higher. This means that the amount you pay each month in debt cannot exceed 45% of your monthly income.

With compensating factors to your whole credit package, such as a lot of money put away somewhere in the form of liquid assets, low LTV (Loan to Value), great job time, low loan terms (15 year mortgage vs. 30 year mortgage) amongst others, you may be able to get qualified for a home loan with a higher DTI (debt to income ratio) than usual. This is very common with the use of automated underwriting engines, such as DU (Desktop Underwriting).

When calculating debt-to-income ratios, lenders will include the following things in your debt: your proposed mortgage payment; credit card payments; car payments; loan payments, including student loans; second mortgage payment or home equity line of credit payment; and payments for any loans you may have cosigned on, even if you are not the one making the payment.
They will usually include student loan payments, even if you have not started making payments yet.
They will usually not include payments on any account that has less than 10 monthly payments left.
They will not include payments for any accounts that you are going to pay off before or at closing.

Some lenders will allow you to not include a cosigned debt into your debt ratio, if the account is over 12 months old and you can show proof (12 months of proof) that someone else is making the payments on the debt. Cancelled checks would be the most fool proof way to show that someone else is making the payment. If the other person is paying you with cash there will be no way to prove that they make the payments and you will have to keep that debt calculated into your debt to income ratio.

If you plan to consolidate some credit card debt with your refinance, paying accounts off at the closing will remove them from the DTI calculation. Generally, it makes sense to pay off the accounts that have the highest monthly payments relative to their balances. Your mortgage professional can help you make these decisions to your best advantage.


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