A comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.As far as underwriters are concerned, the Back DTI (total monthly obligations divided by total monthly income) carries more weight than the Front DTI (monthly housing expenses divided by total monthly income). In fact, some lender banks have disregarded the Front Debt-to-Income ratio altogether and look only at the Back DTI.
On conforming mortgages your loan officer can use electronic underwriting which may allow you to have higher debt ratios. Loans that have 50, 60, or 70% debt ratios have gone electronically because of loan to values, a great credit history, or alot of assets.
Even though you may not meet the DTI requirement, some lenders will expand that limit for a small increase in rate.
Even if you do not meet the DTI requirements, there are variations that will allow you to get the needed financing. A No Ratio loan, allows you to get financing, with a small rise in the rate.
If you have income above and beyond a standard wage, for example income from a business or outside consulting work, or tips for that matter, which may be difficult to document, and therefore makes it difficult to qualify for the house you can afford using your selected program's Debt to Income Ratios, your mortgage specialist may mention the option of using a stated income program to help get you into the house which you can actually afford by using your true total income.
Contrary to a common belief, the debt to income ratio is still taken into consideration even on a "stated" income loan program. A "No Ratio" loan program is the one where the lender will give no consideration to the debt to income ratio.
Although many lenders have programs that allow up to a 55% debt to income ratios, it is not always in the best route to take. The borrower should consider what his or her potential for an increase or decrease in income could be over several years. Discussing your short and long term goals with your mortgage broker will allow them to find a loan program that is in your best interest.
Debt to Income Ratio
Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.
Debt limit
There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit.
Understanding the qualifying ratio
Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.
For example:
With a 28/36 qualifying ratio:
Gross monthly income of $3,500 x .28 = $980 can be applied to housing
Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 qualifying ratio:
Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
Simply guidelines
Remember these are just guidelines. We'd be happy to pre-qualify you to determine how large a mortgage loan you can afford. We look forward to helping you buy your dream home.
This ratio, also known as "DTI", is very important in the eyes of each Lender. Some lenders will allow your DTI to be as high as 55% making it even easier to qualify for a mortgage.
Other lenders will want to see your DTI at 40% or below and usually conforming loans will have this stipulation. Many niche programs do allow for higher DTI ratios. If you are currently looking for a loan you might want to consider consulting a mortgage broker to find out what percentage your DTI is and what programs are available.
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