Mortgages and the Debt to Income Ratio
The most heavily weighed factor in mortgage qualification is your debt to income ratio, or your DTI. This will determine the size of loan you can actually afford. Your DTI is basically the percentage of income that is already claimed by monthly expenses, including rent, bills, car payments, and other loan payments. By taking the amount of monthly expenses and dividing that by your total income, anyone can calculate a debt to income ratio. In order to qualify for particular mortgages, this number must lower than the maximum level, which for most lenders is around 45%.
Here is an example of a DTI. For someone who has an annual income of $120K, their monthly income is $10K. If that person’s monthly liabilities totaled to $4K, then their DTI is 40%. The DTI ratio is then broken into greater detail by separating it into two figures. One figure represents al expenses or liabilities against income, while the other only accounts for a housing payment versus income. Continuing with the previous example, the top figure (including all liabilities) would be 60% if their housing payment was $2K per month, their bottom figure (accounting only for the housing payment) would be at 20%. If a lender requires the top number to fall under 45% and the bottom number to fall under 30%, the person in the example would not qualify.
Some borrowers strategize to pay of debts with their new mortgage. This is definitely an effective way to consolidate debt, but it will not change your DTI. The monthly payments on credit card debt or other revolving accounts will still be considered as part of your debt to income ratio when it comes to qualifying for a mortgage. This is actually designed to protect borrowers and lenders by discouraging the refinancing of credit card debt into a new mortgage only to run the bills back up on those accounts afterwards. By considering these accounts as part of a person’s DTI, the lender is able to see a more accurate representation of that person’s ability to handle debt. This is the case unless the borrower has sufficient verified assets to cover the additional debt that will be refinanced into their new loan.
Most lenders choose to avoid loans that require full documentation if they doubt the potential homeowner’s qualification based on their documented annual income. So lenders offer what are known as reduced documentation loans such as Stated Income/Verified Assets loans, or SIVA as well as No Ratio loans, which require no income or verified assets. Though some people are leery of the legitimacy of a reduced documentation loan, they are actually very helpful tools in certain situations. For those borrowers who have recently increased their annual income and cannot show documented income for that amount over the last two years because it was only recently they obtained it. These loans are also helpful to self-employed borrowers that might have complicated tax schedules.
The debt to income ratio is not only a determining factor in loan application but it is also a great way for people to determine what kind of mortgage they can afford prior to going through the application process. It saves time to understand your DTI situation before beginning the search for a new home.
About the Author: Peter Dellane is the President of Ability Mortgage Group, LLC, A leading Maryland Mortgage broker company offering low costs zero point mortgages. For more information on Mortgage Maryland rates and programs please visit www.marylandsmortgage.com.
Here is an example of a DTI. For someone who has an annual income of $120K, their monthly income is $10K. If that person’s monthly liabilities totaled to $4K, then their DTI is 40%. The DTI ratio is then broken into greater detail by separating it into two figures. One figure represents al expenses or liabilities against income, while the other only accounts for a housing payment versus income. Continuing with the previous example, the top figure (including all liabilities) would be 60% if their housing payment was $2K per month, their bottom figure (accounting only for the housing payment) would be at 20%. If a lender requires the top number to fall under 45% and the bottom number to fall under 30%, the person in the example would not qualify.
Some borrowers strategize to pay of debts with their new mortgage. This is definitely an effective way to consolidate debt, but it will not change your DTI. The monthly payments on credit card debt or other revolving accounts will still be considered as part of your debt to income ratio when it comes to qualifying for a mortgage. This is actually designed to protect borrowers and lenders by discouraging the refinancing of credit card debt into a new mortgage only to run the bills back up on those accounts afterwards. By considering these accounts as part of a person’s DTI, the lender is able to see a more accurate representation of that person’s ability to handle debt. This is the case unless the borrower has sufficient verified assets to cover the additional debt that will be refinanced into their new loan.
Most lenders choose to avoid loans that require full documentation if they doubt the potential homeowner’s qualification based on their documented annual income. So lenders offer what are known as reduced documentation loans such as Stated Income/Verified Assets loans, or SIVA as well as No Ratio loans, which require no income or verified assets. Though some people are leery of the legitimacy of a reduced documentation loan, they are actually very helpful tools in certain situations. For those borrowers who have recently increased their annual income and cannot show documented income for that amount over the last two years because it was only recently they obtained it. These loans are also helpful to self-employed borrowers that might have complicated tax schedules.
The debt to income ratio is not only a determining factor in loan application but it is also a great way for people to determine what kind of mortgage they can afford prior to going through the application process. It saves time to understand your DTI situation before beginning the search for a new home.
About the Author: Peter Dellane is the President of Ability Mortgage Group, LLC, A leading Maryland Mortgage broker company offering low costs zero point mortgages. For more information on Mortgage Maryland rates and programs please visit www.marylandsmortgage.com.
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