Debt to Income Ratios, often referred to as "DTI's", are a key
calculation used in the refinance, debt consolidation, and
purchase mortgage application process. A debt to income ratio is
arrived at by dividing your monthly debt payments by your
pre-tax income. Debt to income ratios are finally used to
determine how much money you can borrow, and a thorough
knowledge of DTIs can help you get the most value from your
refinance, debt consolidation or purchase mortgage transaction.
There are two different types of debt to income ratios which are
used in refinance, debt consolidation or purchase mortgage
underwriting, a Front End Ratio (or "Front Ratio") and a Back
End Ratio (or "Back Ratio").
The Front Ratio is calculated by dividing the sum of your total
monthly housing expenses, consisting of your mortgage payment
including principal interest taxes and insurance as well as
homeowner's association fees, mandatory maintenance fees, common
charges in a development and mortgage insurance if applicable.
The Back Ratio is similar to the front ratio, but on top of
basic housing expenses the back end ratio also includes your
other monthly debt payments, particularly consumer debt
payments, into the calculation. Examples of monthly consumer
debts are your credit card bills, automobile payments, personal
or student loans, etc. Examples of items not typically included
in a back end ratio would be life, health & car insurance
premiums.
When your lender is evaluating your application, they are in
fact trying to match your application with the lending criteria
for the program which you want to see if you qualify for the
loan. While there are many factors in determining how much money
you can borrow and at what rate, debt to income ratio is amongst
the most important. A good credit, conventional mortgage program
will very often have a debt to income ratio requirement of 33/38
- front/back, meaning that your monthly housing costs should be
less than one third of your gross income per month.
If you make $3,000.00 per month, that means the maximum mortgage
payment you could qualify for under a 33/38 program would be
$1,000.00 per month inclusive of principal interest taxes and
insurance as well as other housing costs, and your will only be
allowed a total monthly expenditure including mortgage, credit
cards and other consumer debts totaling $1,140.00. That may seem
very conservative, and it is. If you've ever been turned down by
a brick and mortar bank for a mortgage refinance, debt
consolidation loan or for financing a new home purchase, chances
are it had something to do with your program's low debt to
income ratio.
Many modern lenders are not as concerned about the back end
ratio at all and decide solely on the basis of the front ratio,
and in the case of a veteran's VA loan, their guidelines only
concern the back ratio and ignore the front. FHA loans allow you
to carry more consumer debt but with a higher income
requirement, with a standard debt to income ratio guidance of
29/41 - front/back.
Progressive lenders now have programs with excellent rates which
allow individuals to borrow up to 100% financing and in certain
cases up to millions of dollars at even better rates than many
of 33/38 programs, but which allow for a debt to income ratio of
up to 55% or even 60% in some cases, whether you prove your
income through tax returns and W2 forms or simply state how much
you earn. These relaxed debt to income ratio criteria allow you
to borrow more easily without the fear of rejection, and the
better your credit and the larger your down payment in the case
of a purchase or equity in the case of a refinance or debt
consolidation the more relaxed these criteria can be. Debt
consolidation programs can often make it much easier to qualify
if you mandate that certain consumer debt accounts be directly
paid off, thereby reducing your monthly consumer debt payments.
Contact a nationally capable mortgage broker so that you have
access to a wide variety of programs, and be honest with your
loan officer about your earnings and debts and things will go
smoothly. Remember, they want to get you the money you need, and
will work with you to make sure that happens.
