Do you know how to determine your debt-to-income ratio (DTI)?

The Mortgage Outlet would like to show you just how simple it is.  The debt-to-income ratio (DTI) compares your monthly debt expenses to your monthly gross income.  The debt-to-income ratio is a basic calculation used to pre-approve you for a mortgage.  Lenders look at this number when they are trying to decide whether to lend you money or extend credit.  Your DTI also affects the amount of money you can borrow from a lender. It is important that you Know you Debt-to-Income ration before you buy in Sayville NY. 

Make sure you are using the correct income to determine this ratio

The income used should be taken from your yearly 1040 and 1120 (self employed) tax returns.  Here you will find the most accurate information to determine your actual income.  Remember to check your tax returns to see if you file a schedule "A".  This form usually has expenses that will decrease the income lenders use to qualify you with.  Unfortunately, this could be the main reason why you initially get a pre-approval, but then are unable to get your final approval because your income is lower that you expected.  

Two numbers to keep in mind

Your (DTI) has two ratios to keep in mind when computing how much you will qualify for.  The most important number is your total back end ratio or your total DTI.  The back end ratio is a combination of your mortgage payment plus all of your monthly debts.  The front end ratio is a percentage of your gross monthly income and includes only your mortgage payment. 

The math

To determine your debt-to-income (DTI) ratio you need to know the following:

• All of your monthly recurring debt obligations including your mortgage payment (principal, interest, taxes and insurance), home equity payments, car loans, student loans, credit cards, child support, alimony and any other loans you might have.  Do not include monthly spending for groceries, entertainment and utilities. 

• Your monthly gross income.  If this varies, take an average by looking at the past 2 year's tax returns.

• Divide monthly minimum debt by monthly gross income

Based on an Annual Income of $80,000 divided by 12 months = $6,666.67/mth, below are  ratios which you will qualify for:       

• 6,666.67 x 35% (.35) =  $ 2,333.33 total debt/mth
• 6.666.67 x 40% (.40) =  $ 2,666.64 total debt/mth
• 6,666.67 x 45% (.45) =  $ 3,000.00 total debt/mth
• 6,666.67 x 50% (.50) =  $ 3,333.33 total debt/mth
• 6,666.67 x 55% (.55) =  $ 3,666.66 total debt/mth

Based on an annual Income of $80,000, let's use 45% DTI as an example:

  6,666.67 x 45% (.45) = $ 3,000.00 Total Debt/mth

                             Less  -  $    400.00 Credit Card Debt

                             Less  -  $    400.00Car Payment

                                          $ 2,200.00 Maximum Mortgage Payment

Now that you know your DTI, you can begin shopping for a mortgage.

What types of lenders offer lower and higher qualifying ratios?

• Credit Unions typically offer loans that have the lowest interest rates.  They require very low total debt ratios as they are seeking out only the best clients to work with.

• Most banks and savings and loans provide conventional loans having total debt ratios that do not exceed 45%.

• Loans insured by the FHA, VA or USDA typically will allow ratios higher than 50% some even as high as 55%. Take your time time and do you research.  Should you have any questions, please do not hesitate to give us a call at 631-767-8948.  Remember to know your Debt-to-Income Ratio before you buy in Sayville NY.