YOUR DEBT TO INCOME RATIO
DTI may seem like a dull subject--until you're about to buy your first home. Suddenly, it's 'must read' material! So here it is, the Debt-To-Income explainer. You're welcome! Reach out if you have questions, or when you're ready to start your DC home purchase!
WHAT IS DTI?
Debt to income, OR DTI, is the ratio of your monthly debts to your monthly gross income. Your monthly debits are divided by your gross monthly income. The resulting ratio is used by credit scorers and is a factor lenders use to measure your ability to make payments on loans.
WHY IS DEBT TO INCOME RATIO IMPORTANT?
Your debt to income ratio can affect your credit score and ability to secure a loan. Lenders study the amount of debt borrowers can acquire before having financial difficulties. This data is used to set lending amounts. Acceptable DTI varies by underwriter, lender and loan program, but limits are typically in the 36% to 45% range.
HOW IS IT CALCULATED?
To calculate your debt to income ratio, add your monthly debt payments and divide by your gross monthly income. Gross monthly income is the sum earned before taxes and other deductions. A word to the wise: Lenders can calculate DTI without necessary expenses such as health insurance premiums, food, transportation costs, utility bills and annual fees you may pay. Because of this, you may be approved for a loan amount that is much higher than is advisable for your financial health. Keep this in mind when deciding how much to spend on a home, and remember that it is important to set aside income for reserves, repairs, mechanical replacements, etc.
FANNIE MAE INCREASED DTI RATIO CAP
A recent increase allows borrowers to have a maximum DTI ratio limit of 50%, up from the previous 45%.
DTI RATIO CAPS
For manually underwritten loans, Fannie Mae’s standard maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.
For loan casefiles underwritten through Fannie Mae's Desktop Underwriter®, the maximum allowable DTI ratio is 50%.
EXCEPTIONS TO THE DTI RULE
The CFPB says The debt to income ratio cap is typically the highest ratio a borrower can have and still get a Qualified Mortgage, but there are some exceptions. A small creditor must consider your ratio, but is allowed to offer a Qualified Mortgage with a ratio higher than the cap. In most cases, a lender is a 'small creditor' if it had under $2 billion in assets in the last year and generated no 500 mortgages or less during the previous year.
Larger lenders may still make a mortgage loan if your debt to income ratio is above the cap, even if this prevents it from being a Qualified Mortgage. But they will have to make a reasonable, good-faith effort, following the CFPB’s rules, to determine that you have the ability to repay the loan.
LOWERING YOUR DEBT TO INCOME RATIO
If your DTI ratio is adversely affecting your credit scores and ability to obtain a mortgage loan, start by discussing the issue with your mortgage lender and financial advisor. It's likely they'll recommend some or all of these steps:
- Pay down credit cards
- Increase credit limits
- Reduce or eliminate smaller monthly debts
- Increase your down payment amount
- Increasing your income by disclosing non-traditional sources. Some lenders factor in sources of income such as alimony, military or work housing stipends and trust income.
- Take on no new debt while you pay off existing debt
Monitor your progress with a mortgage calculator
DTI RATIO ARTICLES
Sources
Nerd Wallet
