What is DTI and How It Affects Your Mortgage Application
Ever wonder why it's essential to keep your debt in check when applying for a mortgage or what debt matters to your approval? This article will help you answer these fundamental questions so that you're in a great position to get approved for a home loan.
All About Debt-To-Income Ratio (DTI)
Your debt-to-income ratio (DTI) is one of the most critical metrics lenders use to determine how much home you afford because it directly influences the monthly payment you can qualify for.
DTI is a ratio that compares your existing monthly payments with your gross monthly income before taxes. Depending on the mortgage program and your qualification metrics, two types of calculations are used in mortgage qualification:
- Front-end DTI -looks at the amount you spend on housing as compared to your total income
- Back-end DTI - looks are installment and revolving debts
The front-end DTI is used on specific government loans if you're considered a bit more of a risk. For example, getting approved for an FHA loan with a credit score below 620 will require a front-end DTI no higher than 38%.
A back-end DTI, however, is always calculated.
What Is A Good Debt-To-Income Ratio TO Have?
As a general rule, it's best to keep your DTI at or below 43%. However, the exact limitation depends on other qualifications and the type of loan you're applying for.
For example, with a conventional loan through Fannie Mae or Freddie Mac, you can have a DTI as high as 50%. However, Fannie Mae will also consider your credit card behavior. Someone who pays off most or all of the monthly balance is regarded as a lower-risk borrower than someone with an otherwise identical credit history and makes only the minimum payment on their credit cards. Thus DTI requirements for each of these borrowers may vary.
What Debts Are Included In Debt-To-Income Ratio?
Not every payment counts toward your DTI. Typically, only the items that appear on your credit report will be part of your DTI calculation, such as:
- Mortgage payments
- Home equity loans or home equity lines of credit (HELOC)
- Car loans
- Student loans
- Personal loans
- Child support or alimony payments
- Credit cards
Items like utilities, cell phone, or cable tv bills may not show up on your credit report, but it's still necessary to stay current on these payments. Late or non-payments on these accounts can lower your credit score if it goes into collections.
Special Considerations For Debt-To-Income Ratio Calculations
Many factors determine how student loans are counted in your DTI calculation. It depends not only on the type of mortgage loan you're getting but also on whether the student loan is in a repayment period, deferment, or forbearance.
Different regulations apply when it comes to alimony. For example, suppose you're getting a conventional, FHA, or VA loan. In that case, alimony payments are subtracted from your income rather than included as part of your debt, which could make it easier for you to qualify.
However, existing alimony payments are included in your DTI as debt with a USDA loan or a jumbo loan.
Now that you know more about your DTI and how it's factored into your mortgage qualification, you're ready to apply! Get started online or connect with us over the phone to learn more about the best loan option for you and your DTI standing.