George Souto, in Connecticutt, has written a very good explanation of what is included in the Debt-to-Income calculations for loans. This can be a bit confusing, as some types of loans have different items included, but George has set it out very clearly.
I wrote a blog "Not Everything In Debt-To-Income Ratios Are The Same In Loan Programs" earlier this week pointing out that the Consumer Financial Protection Bureau (CFPB) QM Rule for a flat Total Debt-To-Income Ratio of 43% on all Loan Programs was not a wise or practical thing to do. In the blog I gave examples of what makes up the Housing Ratio and Total-Debt-To-Income Ratios (DTI)) for each Loan Program, however, the way I presented it was a little difficult to follow. So Brenda Mullen, in her comment on my blog, asked if I could write another blog just on What Is Included In The Debt-To-Income Ratios?
A Debt-To-Income Ratios is the Percentage of the Borrower(s) Monthly Debt versus the Monthly Borrower(s) income. In other words the Borrower(s) Debt divided by 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 Downpayment is 20% or more.
- Monthly Insurance Premium (MIP) - Only on FHA Loans
- Downpayment 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 that 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 if not done at the same time as the First Mortgage, or was done at the same time but is being subordinated on a new loan.
- Child Day Care - Only on VA Loans.
- Child Support Payments
- Alimony Payments
- Existing Mortgage Payments (second home, investment property, etc.)
There are exceptions for some of the above debts if they only have a certain amount of payments left, or if a loan is being deferred, which is common of student loans. But as a general rule, the above debts will be include in the Total-Debt-To Income Ratio.
I hope I have been able to provide the above information on What Is Included In The Debt-To-Income Ratios, in a basic easy to understand format, that is easy to explain, and proves useful to those reading it.
Info about the author:
George Souto is a Loan Officer 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, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org