The ratio is expressed as a percentage which results when a borrowers payment obligations on long term debts is divided by the borrowers effective income. This is calculated on a net income for FHA, VA mortgages and on a gross income basis for conventional mortgages. (also referred to as housing expenses to income ratios).It is important to note that many lenders look at what is referred to as front and back end ratios. The front-end ratio is the housing payment vs. gross income and the back-end ratio is the total monthly (excluding utilities, food, or other non-recurring/variable expenses) vs. gross income. Some lenders will go as high as 55% on the back-end ratio depending upon certain factors such as the borrower's credit score & loan amount.
Front ratio is calculated by dividing your gross monthly income by your housing expenses - those include principal, interest, real estate taxes, homeowners insurance, mortgage insurance (PMI) and association fees - the latter two you may or may not have and if you have condominium association, insurance is often included in association fee.
When calculating back ratio your monthly consumer debt payments are also included like payments for your cars, credit cards, installment loans including student ones, second mortgage, etc.
Lower debt to income ratios allow you to get the best rates and quicker loan approvals.
Borrowers having trouble qualifying for loans on the basis of their debt to income ratio should speak with a loan officer about paying off certain high monthly payment consumer debts or exploring stated income alternatives to their selected loan program.
Conforming loans will require lower DTIs than will your subprime loans. Once your mortgage professional knows what your income is and has as chance to pull your credit he or she will be able to determine what category of loans you will qaulify for. This is done is the first stage of the loan process called the pre-qualification.
Your debt to income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other continuing obligations are met. The ratio is one of the many things a lender considers before approving your home loan.
As one of the underwriting criteria, Debt-to-Income ratio carries much weight in the loan approval process. For homeowners with occupations that are difficult to document income, many lenders offer loan programs in which DTI ratios are not considered in the underwriting process.
Debt ratios tell the lender whether or not you will be able to afford the proposed payment. The lender looks at the total gross income before taxes and other deductions and uses this number in the factor to determine the income you qualify with.
The lower your income to debt, the more secure the lender feels.
Your debt to income ratio (DTI) is a key indicator of your true financial picture. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food, entertainment) by monthly gross income. For example, personal gross monthly income of $3,000 who is making Minimum Payments of $1000 on debt (loans and credit cards) has a debt to income ratio of 33 percent ($1000 / $3000 = .33). Contact A Mortgage Professional to help you determine your DTI.
