How Debt-To Income Ratio Are Calculated

Debt-To Income Ratios (DTI) play a significant role in qualifying for a mortgage.  Long gone are the days where a Borrower's DTI Ratios could be 67% and higher.  Today most loan products require a DTI Ratio of 45% or less.  One of the few exceptions is FHA which still allows DTI Ratios in the 50+% range.  For this reason it is important for Borrowers to understand How Debt-To Income Ratio Are Calculated in order to lower them as much as possible.

A Debt-To-Income Ratios is the Percentage of the Borrower(s) Monthly Debt versus the Borrower(s) Monthly Income.  In other words the Borrower(s) Debt divided by the Borrower(s) Income = Debt-To-Income Ratio (DTI). For example if the Borrower(s) have $2,000 in Monthly Debt, and $5,000 of Monthly Income:

$2,000/$5,000 = .40% DTI 

Every Borrower(s) has TWO Debt-To-Income Ratios: 

• The first is the Housing Ratio, known as the "Front or Top Ratio"
• The second is the Total Debt-To-Income Ratio, known as the "Back or Bottom Ratio". 

The following is what is included in each Ratio.  As I list each debt that is calculated into the Debt-To-Income Ratio's, I will indicate if the debt is just specific to a Loan Program.

Housing Ratio more commonly known as the "Front or Top Ratio" consists of:

• The Loan Principle & Interest
• Property Taxes
• Homeowners Insurance (hazard insurance)
• Homeowners or Condo Association Fees (HOA) Note: only if the property is located in a development that has a Homeowners Association.
• Private Mortgage Insurance (PMI) - Only on Conventional, or USDA Rural Loans.  Note: There is no PMI on Conventional Loans if Borrower's Down Payment is 20% or more.
• Monthly Insurance Premium (MIP) - Is only on FHA Loans
• Down Payment Assistance Loans
• Second Mortgage, Line of Credit, if it is done at the same time as the First Mortgage. 

Total Debt-To-Income Ratio more commonly known as the "Back or Bottom Ratio" consists of all the debts which were included in the Housing Ratio plus:

• All Monthly Revolving Debt such as:
• Credit Cards
• Loans such as:
• Car Loans
• Student Loans
• Personal Loans
  Second Mortgage, Home Equity, & Line of Credit.
  
• Child Day Care - Only on VA Loans.
• Child Support Payments
• Alimony Payments
• Existing Mortgage Payments (second home, investment property, etc.)

I hope I have been able to provide the above information on How Debt-To Income Ratio Are Calculated, in an easy to understand format, and help Borrower(s) to understand what debts they can reduce to lower their Total Debt-To-Income Ratio.

 

 

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com