What do mortgage lenders look for debt-to-income ratio?
Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
If you are truly trying to afford more home than what traditional lenders will allow, there are lenders who have special programs with a maximum back end DTI of 50%-55%. Lenders who offer high DTI mortgages are portfolio lenders who keep the loans in their own portfolios or sell them to private investors.
Lenders will look at your front-end debt-to-income ratio, which measures how much is used for your monthly mortgage payment, including property taxes, mortgage insurance and homeowners insurance payments.
Look into refinancing or debt consolidation
Refinancing and debt consolidation allow you to obtain a new loan with a lower interest rate compared to your existing debts. Once you get a better loan term it will be easier to pay off your existing debts and improve your debt-to-income ratio.
Key takeaways
Your debt-to-income ratio (DTI) is your total monthly debt payments divided by your total gross monthly income. It helps lenders determine your approval odds and the likelihood of you being able to make your monthly payments.
A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
* Monthly rent payment is usually not included in DTI when applying for a home loan since it is assumed current rent will be replaced by future mortgage.
Here's an example: A borrower with rent of $1,200, a car payment of $400, a minimum credit card payment of $200 and a gross monthly income of $6,000 has a debt-to-income ratio of 30%. In this example, $1,800 is the sum of all debt payments.
How can I lower my debt-to-income ratio fast?
- Increase the amount you pay monthly toward your debts. Extra payments can help lower your overall debt more quickly.
- Ask creditors to reduce your interest rate, which would lead to savings that you could use to pay down debt.
- Avoid taking on more debt.
- Look for ways to increase your income.
Generally speaking, most mortgage lenders use a 43% DTI ratio as a maximum for borrowers. If you have a DTI ratio higher than 43%, you probably are carrying too much debt because you are less likely to qualify for a mortgage loan.
A good DTI ratio to get approved for a mortgage is under 36%, but it's possible to qualify with a higher ratio. Barbara Marquand writes about mortgages, homebuying and homeownership.
It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions. These Cs have been extended to 5 by adding 'Collateral', or extended to 6 by adding 'Competition' to it (Reference: Credit Management and Debt Recovery by Bobby Rozario, Puru Grover).
To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.
Total Mortgage Expense Debt-to-Income Ratio
To determine your mortgage expenses, lenders include the following in their calculations: Principal and interest. Escrow deposits for taxes. Hazard and mortgage insurance premiums.
Broadly speaking, there are two ways to improve your DTI ratio: Reduce your monthly debt payments, and increase your income.
A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum debt-to-income ratio at which you're eligible for a Qualified Mortgage —a type of home loan designed to be stable and borrower-friendly.
Debt-to-Income Ratio Requirements
This is also known as your DTI ratio. FHA guidelines call for borrowers to have a DTI ratio of 43% or less. They also indicate that a mortgage payment should not exceed 31% of a person's gross effective income.
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
Are utilities considered debt?
Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water)
Paying off your credit card balance every month is one of the factors that can help you improve your scores. Companies use several factors to calculate your credit scores. One factor they look at is how much credit you are using compared to how much you have available.
If your monthly debts total $2,500 and your gross monthly income is $5,000, your DTI calculation would look like: $2,500 / $5,000 = 0.5. To get the ratio as a percentage, you would then multiply 0.5 x 100 = 50%. Your DTI would be 50%. The ideal DTI varies by lender, type of loan and loan size.
Should you pay off all credit card debt before getting a mortgage? In some cases, especially if your current credit score makes it difficult for you to get a mortgage loan, it's a good idea to pay down credit card debt. But keep in mind that credit card debt isn't the only factor in getting mortgage approval.
The good news is that debt doesn't automatically bar you from getting a mortgage.
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