What is a debt-to-income ratio or “DTI”?
Debt-to-income ratio or DTI is a ratio lenders use to determine if you qualify for a mortgage.
What does the ratio consist of?
DTI consists of a “front” ratio and “back” or “total” debt ratio.
How is the front ratio calculated?
Lenders calculate the front ratio by first adding up your proposed housing payment (principal, interest, taxes, insurance, and other applicable carrying costs such as HOA dues, flood insurance, or PMI). They then divide this housing payment by your monthly income.
How is the back ratio calculated?
They calculate the back ratio by taking your housing payment and all other monthly debt payments, then dividing that number by your monthly income.
What is included in other monthly payments?
Payments for a car loan, car lease, student loan, credit card debt, or a mortgage on another property.
Here’s an example: let’s say you want to buy a condo. Based on the rate from your lender, your housing payment including taxes, insurance, and HOA dues (also called common charges) adds up to $2,000 per month. Your salary at your job is $72,000 a year, or $6,000 per month. Therefore, your front ratio is 33% ($2,000 divided by $6,000).
But you have other debt the lender has to take into consideration. Your student loans add up to $380/month, you’ve got a car loan at $320/month, and your payments on credit cards add up to $600 per month. You don’t have any other mortgage debt. Therefore your total debt-to-income ratio is 55% ($3,300 divided by $6,000).
What DTI is allowed?
According to your loan officer, a 55% DTI ratio is too high for the conventional mortgage you have applied for. He tells you your loan is not going through automated underwriting. Most lenders use Fannie Mae’s automated underwriting system called Desktop Underwriting. When you run a loan through DU, your lender is submitting your loan application and credit report to Fannie Mae and asking for an approval. If your loan doesn’t go through DU, it means it has failed to meet Fannie’s guidelines. In your case, it’s because your DTI exceeds the maximum ratios for Fannie Mae.
What can you do to lower your DTI?
Because you really want to buy this house. You’ve already put your house on the market. You’re planning on moving in a couple of months.
You ask to sit down with your loan officer to go over the numbers again. He agrees to do so, and he asks his underwriter to join you.
The underwriter explains how they calculated your ratios. She notices that part of your other debt is a payment on a car loan. She asks how many months are left on the loan. You tell her it’s almost over — you have 6 more payments left.
She tells you this important tip: if you have an installment loan (like a car loan) with 10 months left or less, you don’t need to count it in the DTI calculation. It’s like it’s not there.
Once she removes the $320/month payment, your total ratio drops to 45%. She resubmits your loan to DU and it goes through. You are approved!
To find out what your ratios are and if you qualify for the loan you’re seeking, call Amerifund at (888) 650-7316 or fill out this form and someone will contact you.
(c) Copyright Eris Saari 2016, 2019