Debt-To-Income Ratios - 3 Things to Know
Your debt-to-income ratio (DTI) is a calculation lenders use to determine whether you can afford a mortgage loan.
This ratio is calculated by dividing your monthly debt by your monthly income to arrive at a debt-to-income percentage.
Since this computation affects your mortgage qualifications, here are three things you should understand: 1.
Front End/Back End There are actually two ratios that your lender will examine.
First, you have a "front end ratio," which is calculated by dividing your new monthly mortgage debt by your gross monthly income.
Second, there is the "back end ratio," which adds your other debts to the formula.
The ideal scenario for lenders is a front end ratio of 28% and a back end ratio of 36%; however, there are many lenders who will qualify you with back end ratios as high as 55-60%.
2.
Excludes Expenses Not On Credit Report Your DTI only considers monthly expenses that report to the credit bureaus.
Your monthly grocery bill, gas bill, phone bills, etc.
are not considered.
Therefore, you should do some math yourself to guarantee you can fit the new loan in your budget after taxes are deducted from your paycheck and you pay the aforementioned extraneous expenses.
3.
Some Debts Can Be Removed Many people have debts on their credit reports that they do not pay, such as loans they simply cosigned for.
This debt, technically, must be calculated into your DTI; however, many lenders will remove it if you can provide them with twelve month's cancelled checks proving the debt is paid by someone other than yourself.
Also, debts with less than ten months left in repayment can often be removed.
These three ideas are important to understand, but, ultimately, you still must decide if you can afford a mortgage comfortably.
This ratio is calculated by dividing your monthly debt by your monthly income to arrive at a debt-to-income percentage.
Since this computation affects your mortgage qualifications, here are three things you should understand: 1.
Front End/Back End There are actually two ratios that your lender will examine.
First, you have a "front end ratio," which is calculated by dividing your new monthly mortgage debt by your gross monthly income.
Second, there is the "back end ratio," which adds your other debts to the formula.
The ideal scenario for lenders is a front end ratio of 28% and a back end ratio of 36%; however, there are many lenders who will qualify you with back end ratios as high as 55-60%.
2.
Excludes Expenses Not On Credit Report Your DTI only considers monthly expenses that report to the credit bureaus.
Your monthly grocery bill, gas bill, phone bills, etc.
are not considered.
Therefore, you should do some math yourself to guarantee you can fit the new loan in your budget after taxes are deducted from your paycheck and you pay the aforementioned extraneous expenses.
3.
Some Debts Can Be Removed Many people have debts on their credit reports that they do not pay, such as loans they simply cosigned for.
This debt, technically, must be calculated into your DTI; however, many lenders will remove it if you can provide them with twelve month's cancelled checks proving the debt is paid by someone other than yourself.
Also, debts with less than ten months left in repayment can often be removed.
These three ideas are important to understand, but, ultimately, you still must decide if you can afford a mortgage comfortably.
