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Why You Need To Know Your Debt To Income Ratio

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Mortgage and Lending with and for 1st Time Buyers, Move Up Buyers & Investors 207897nmls# DOC#207897

Why You Need To Know Your Debt To Income Ratio

Starting to Shop for a Mortgage? How to Assess Your 'Debt-to-Income Ratio' and Why This Number Matters

 

Before you start shopping for a home you should start the process of shopping for a home loan.  Having financing ahead of time may make it easier to get sellers to take a buyer seriously and help move along the closing process. For those who are looking to get a mortgage, the most important factor for having a mortgage application approved is the debt-to-income ratio of the borrower.

What Is a Debt-to-Income Ratio?

 

A debt-to-income ratio is simply the percentage of debt compared to the amount of income that a person brings in. If a person brought home $1,000 a month and had $500 worth of debt, that person would have a DTI of 50 percent. To improve the odds of getting a home loan, experts recommend that potential borrowers keep their DTI under 43 percent.

 

What Debt Will Lenders Look At?

 

The good news for borrowers is that lenders will disregard some debt when calculating a borrower’s DTI. For example, a health insurance premium would not be considered as part of your DTI while, and income is calculated on a pre-tax basis. This means that a borrower doesn’t have to factor in taxes when calculating their qualifying income.

 

What lenders will look at are any installment loan obligations such as auto loans or student loans as well as any revolving debt payments such as credit cards or a home equity line of credit. In some cases, a lender will disregard an installment loan debt if the loan is projected to be paid off in the next 10-12 months.

 

What Is Considered as Income?

 

Almost any source of income that can be verified will be counted as income on a mortgage application. Those who receive alimony, investment income or money from a pension or social security will have that money included in their monthly income when they apply for a loan. Wage income is also considered as part of a borrower’s monthly qualifying income. Self-employed individuals can use their net profit as income when applying for a mortgage. However, many lenders will average income in the current year with income from previous years.

 

How Much Debt Is Too Much Debt?

 

Many lenders will only offer loans to those who have a debt-to-income ratio of 43 percent. However, government backed loans may allow borrowers who have a DTI of 50-55 to qualify for a loan depending on their income and other factors. Talking to a lender prior to starting the mortgage application process may be able to help a borrower determine if his or her chosen lender offers such leeway.

 

A borrower’s DTI ratio may be the biggest factor when a lender decides whether to approve a mortgage application. Those who wish to increase their odds of loan approval may decide to lower their DTI by increasing their income or lowering their debt. This may make it easier for the lender and the underwriter to justify making a loan to the borrower.

 

If you have questions about your debit to income ratio please feel free to contact Mark Taylor at 602.361.0707 or by email at mark@awesomerates.com

 

Thanks for taking the time to read, comment and re-post today's blog on:

 

Why You Need To Know Your Debt To Income Ratio

 

 

Comments (5)

Rod Pierson
Wilson Realty Inc - Redding, CA
Northern California - An Agent you can trust

Great article, again I am going to forward onto a friend/lender.    This article spells it out in detail in so many words and one of the main prerequisites to qualifying for a loan.

You have great advice, I have chosen to follow you, keep up the helpful articles. 

Jun 25, 2014 03:57 AM
Trisha Bush-LeFore
Preferred Properties Land & Homes - Walla Walla, WA
Providing Realtor Services in the Walla Walla Area

Mark,

Great post! This information is very helpful for those thinking of buying a home, gives them a good financing starting point. Thanks so much for putting this together and sharing it with us. 

Jun 25, 2014 04:02 AM
Bill Ladewig
LoanOfficerSchool.com - Escondido, CA
Experience Is Your Advantage

Mark, good information that all all should know.

Jun 25, 2014 04:57 AM
Jeff Jensen
The Federal Savings Bank/Lending in 50 states - Greenwich, CT

It certainly is important to know as one contemplates a purchase.

Jun 25, 2014 08:20 AM
Mark Taylor Mortgages
and for 1st Time Buyers, Move Up Buyers & Investors - Scottsdale, AZ
602-361-0707 #MarkTaylor #Awesomerates NMLS#207897

Thanks for reading, following and commenting.  Wishing you all a great day!

Jun 26, 2014 12:31 AM