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D.T.I. Debt to Income Ratio Explained

The last post in this topic was posted 1621 days ago. 

 

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There are a few key things banks look at when you apply for a mortgage - regardless of loan program these few items are at the core of your approval

1 - You should have two years in the same line of work (self employed has to be the same business)

2 - Credit - score requirements vary but no lates within last 12 months etc

3 - Cash needed to close - down payment and closing costs

3 - DEBT To INCOME ratios must be met

 

DTI is a simple calculation - Your gross monthly income, divided by the total of your monthly payments. This is including your projected mortgage payment.

 

Simple math to help explain - if you were fortunate enough to make $10,000 a month and all debts including mortgage added up to $4,000 a month your total debt to income ratio would be 40%

 

There are usually two numbers listed - USDA currently lists 29/41 as the Max Ratios

the front number is just the mortgage payment compared to your gross monthly income

 

Using the numbers from above if the 10,000 income has a mortgage payment which is $2500 of the $4000 a month the ratios would be 25/40

The mortgage being 25% of the 10k and the total payments being 40% of the 10k -

 

If you pay alimony or child support that payment must also be included in the calculations -

 

a side note - all programs allow for some exceptions to the posted guidelines - If your agent can get you an automated underwriting approval the total back end ratio will sometimes approve up to 48-50%

 

If you are struggling making the debt to income ratio work for the home you are interested in there are only a few ways to work around it

Add income or eliminate debt

Adding someone to your loan possible? Paying off cards eliminating the payment,,,,,,,

 

I hope this helps answer some of the questions you may have about the mortgage process -

 

Brian B

Celebrating 10 years assisting members of the Mortgage Forum

Mortgage Forum Lead

 

 

 

 

 

 

 

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Does that 29/41 number for USDA also apply to the other Federal programs (FHA, VA, etc.)?

 

And every conventional lender has their own standards which vary greatly....

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Thanks for doing this Brian, this is great!

 

On the front end ratio, is it strictly the mortgage payment with no taxes or insurance?

 

If you take a loan out from your 401k to make the down payment, will the monthly payment you make back to yourself for the 401k loan be used in the back end ratio calculation? I think the answer is no since it is not considered a "Debt" since you are paying it back to yourself but wanted to make sure.

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I was going to add a note about this - the front end ratio is for the total mortgage payment - Principal, interest, taxes, insurance and mortgage insurance if you have it -

 

If you borrow from your 401k it is NOT counted - it is your money so they dont count it as a debt to someone else

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The ratios posted for the programs varies a little and for the most part it really comes down to what does the automated underwriting system say - if it approves then you have a chance - most banks cap programs at 50% some will allow a little more if it is approved through automated

 

The only time the DTI must be followed is when it is a manual underwrite - (this is what happens when you cannot get an automated approval but you are still eligible)

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Hi Brian,

 

I am looking to reduce my DTI ratio as much as possible before applying for a USDA loan in May. I have a car loan through my local CU with roughly 30 payments left (paying $230 per month). Is it possible to have this loan still open to maximize credit my score, but not be included in my DTI? I was looking at making a large enough payment to leave a remaining balance around $1000. Would this scenario qualify as to not be included in the DTI ratio?

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Hi Brian,

 

I am looking to reduce my DTI ratio as much as possible before applying for a USDA loan in May. I have a car loan through my local CU with roughly 30 payments left (paying $230 per month). Is it possible to have this loan still open to maximize credit my score, but not be included in my DTI? I was looking at making a large enough payment to leave a remaining balance around $1000. Would this scenario qualify as to not be included in the DTI ratio?

Because of the payment size if it isnt paid off they would count the payment - for installment loans less than 100 a month that only have a few payments ;left it can be excluded

What you could do is have the money set aside to pay it off at or right before the closing -

If you are looking to boost the scores now go ahead and do like you suggested - pay it down to a lower balance and then work with the bank to pay the rest at the end of the mortgage process -

 

Hope this helps

Brian B

Mortgage Forum Lead

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Does that 29/41 number for USDA also apply to the other Federal programs (FHA, VA, etc.)?

 

And every conventional lender has their own standards which vary greatly....

FHA : 31/43

VA: 41

Conventional : 28/36

 

 

I recently shopped for a Conv. Loan , the standard DTI numbers were always the same. Interest rates, fees etc. were different.

Edited by parisamour

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