When getting a mortgage your debt to income ratio is a major deciding factor on whether you get approved and for how much. Your debt to income ratio is a calculation of your debts divided by your gross income(before taxes). But there is more to your debt to income ratio, then just the calculation. There is a couple major factors that go into qualifying your debt to income ratio(aka DR ratio). Here is a list of the major items that make up your Debt to Income Ratio for your Mortgage:
1. Bills- When calculating your debt to income ratio, your bills/debts are taken into account. But it is not your total bills, it is only the bills on your credit report. These are called your debts. Bills such as car insurance, cell phone bill, etc or items not on your credit report are not taken into account when calculating your debt to income ratio.
2. Income- When calculating your DR ratio, your gross income is used. This is your income before taxes. If you are self employed your income is calculated based on your income after expenses. If you are self employed, you will want to make sure you send your last 1-2 years tax returns to your loan officer when getting pre-approved. As this could greatly affect your loan approval.
3. Student Loans- If you are getting a FHA loan and your student loans are deferred for over 12mths, you do not need to include the future payment in your debt to income ratio. But if they are not deferred for 12 months or more, you must count the future payment in your debt to income ratio. And if you are getting a conventional loan, you must also count the future student loan payment in your debt to income ratio.
4. Child Support- If you receive child support and the child is 15yrs or younger, you count this as income. If they are older than that you can not count that income, since there is no guarantee it will continue for 3yrs(past age of 18yrs). If you pay child support, this is a bill that is counted in your debt to income ratio. And this is true no matter the age of the child.
5. Less than 10 Payments Left- Many times if you have an installment account(car loan, furniture, etc) and there are less than 10 payments left on the loan you may not need to count this in your DR ratio. Thou keep in mind this is based on the underwriter’s decision.
Your debt to income ratio plays a major role in your loan approval. FHA loans are usually approved based on a maximum debt to income ratio of 45-50%+. Conventional loans are usually approved based on a maximum DR ratio of 45%, depending on your loan to value. Understand that every situation is different. And your debt to income ratio should be calculated by your loan officer. But it is important for you to know how it is calculated, incase you are denied for a mortgage. I have had many examples where other lenders incorrectly calculated a client’s DR ratio, causing their loan to get denied. And I was able to calculate it correctly and get their loan approved vs the denial they had. Get to know what makes up your debt to income ratio, it will affect your mortgage!!
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