Your debt-to-income ratio (DTI) is one of the most important considerations for a mortgage lender because it indicates your financial capacity to repay a mortgage. A higher DTI tends to mean more risk for the lender, a lower DTI means less risk.
What Is DTI?
Your DTI is basically the percentage of your monthly gross income that pays debts such as car loans, student loans, credit cards, etc., as well as housing expenses such as rent or mortgage payments (including taxes, insurance, mortgage insurance, HOAs, etc.).
If you have a high DTI, it indicates that you have tight finances and could have a tougher time keeping up with payments in event of unexpected expenses or a loss of income. If you have a very low DTI, lenders consider it much safer to lend to you because you have the extra cash flow to easily keep up with the payments even if you have a financial emergency.
The maximum DTI allowed in today's mortgage marketplace is 50% for FHA-insured loans and 45% for Fannie Mae conventional loans. In other words, for an FHA loan, no more than 50% of your qualifying monthly income can go to debt and housing expenses, 45% for conventional financing. Fannie Mae and FHA guidelines do occasionally allow for higher DTIs, but only in limited circumstances and with other compensating factors, such as high credit scores, assets, etc.
While you're working with your mortgage lender, you may hear the terms "front end" and "back end" DTI come up. Your "front end" DTI is the percentage of your income that pays just your house payment, including property taxes, homeowners insurance, mortgage insurance, and any HOA fees. "Back end" DTI includes all housing and debt expenses.
Front end DTI isn't quite as important as it used to be, but it is still a consideration occasionally. Most lenders are concerned primarily with your back end DTI.
Calculating Debt-to-Income
To calculate DTI, simply divide your total monthly debt payments and rent or housing payments (including taxes, insurance, mortgage insurance, and HOA fees) by your gross monthly income, as follows:
1) Grab your credit report or most recent statements for all debt obligations. Note that non-debt expenses, such as utility bills, phone, cable, etc., are not included in your DTI.
2) Sum up all payments except for rent or mortgage for the moment. Make sure you include all credit cards (use just the minimum payment), installment loans, auto loans, student loans, and any other debt obligations that you have.
3) Now add in your home mortgage payment (or rent), including property taxes, homeowner's insurance, homeowner's association (HOA) fees, and private mortgage insurance (PMI) premiums.
4) Divide the total by your monthly gross income, then multiply by 100 to get your debt-to-income ratio.
If you're planning to either purchase a home or refinance an existing mortgage and want to get an idea of your qualifying DTI for the new loan, substitute your existing rent or total mortgage payment (including taxes, insurance, HOA fees, and PMI) for the new estimated mortgage payment.
What Is DTI?
Your DTI is basically the percentage of your monthly gross income that pays debts such as car loans, student loans, credit cards, etc., as well as housing expenses such as rent or mortgage payments (including taxes, insurance, mortgage insurance, HOAs, etc.).
If you have a high DTI, it indicates that you have tight finances and could have a tougher time keeping up with payments in event of unexpected expenses or a loss of income. If you have a very low DTI, lenders consider it much safer to lend to you because you have the extra cash flow to easily keep up with the payments even if you have a financial emergency.
The maximum DTI allowed in today's mortgage marketplace is 50% for FHA-insured loans and 45% for Fannie Mae conventional loans. In other words, for an FHA loan, no more than 50% of your qualifying monthly income can go to debt and housing expenses, 45% for conventional financing. Fannie Mae and FHA guidelines do occasionally allow for higher DTIs, but only in limited circumstances and with other compensating factors, such as high credit scores, assets, etc.
While you're working with your mortgage lender, you may hear the terms "front end" and "back end" DTI come up. Your "front end" DTI is the percentage of your income that pays just your house payment, including property taxes, homeowners insurance, mortgage insurance, and any HOA fees. "Back end" DTI includes all housing and debt expenses.
Front end DTI isn't quite as important as it used to be, but it is still a consideration occasionally. Most lenders are concerned primarily with your back end DTI.
Calculating Debt-to-Income
To calculate DTI, simply divide your total monthly debt payments and rent or housing payments (including taxes, insurance, mortgage insurance, and HOA fees) by your gross monthly income, as follows:
1) Grab your credit report or most recent statements for all debt obligations. Note that non-debt expenses, such as utility bills, phone, cable, etc., are not included in your DTI.
2) Sum up all payments except for rent or mortgage for the moment. Make sure you include all credit cards (use just the minimum payment), installment loans, auto loans, student loans, and any other debt obligations that you have.
3) Now add in your home mortgage payment (or rent), including property taxes, homeowner's insurance, homeowner's association (HOA) fees, and private mortgage insurance (PMI) premiums.
4) Divide the total by your monthly gross income, then multiply by 100 to get your debt-to-income ratio.
If you're planning to either purchase a home or refinance an existing mortgage and want to get an idea of your qualifying DTI for the new loan, substitute your existing rent or total mortgage payment (including taxes, insurance, HOA fees, and PMI) for the new estimated mortgage payment.
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