Debt-to-Income Ratios for Mortgages

Mortgage underwriters determine how much of a mortgage you can afford by calculating your debt-to-income ratio, known as your DTI. Learning how this number is calculated can help you understand why you can qualify for a specific mortgage loan amount.

Why should i care about my Debt-To-Income Ratio?

Knowing your Debt-To-Income Ratio is becoming extremely important because Fannie Mae and Freddie Mac have cut their maximum allowed DTI from 55% down to 45%. That is down from a 65% maximum from previous years. FHA, which had been more conservative at a 50% maximum, will most likely follow suit shortly. No income verification and no ratio loan programs are long gone as well, so the only way to get approved is by qualifying for a loan with fully verified income by staying below maximum DTI limits.

There are two DTI calculations - one for your housing DTI and one for your total DTI. Your total DTI includes both your housing payments and all other monthly debt payments.

Your housing payment, which is often referred to as your PITI payment (PITI for Principal, Interest, Taxes and Insurance), is actually the total of a number of potential payments related to owning your home:

•   First Mortgage Payment
• + Second Mortgage Payment
• + Property Taxes
• + Mortgage Insurance
• + Homeowners Insurance
• + Flood Insurance
• + Association Dues
• = Your Total Monthly Housing Payment

Housing expenses such as utilities and repairs are not included in your housing payment.

Your total DTI is simply your total monthly housing payment plus all of your other monthly debt payments added together.

These DTIs calculated as follows:

• Housing DTI: Total Monthly Housing Payment / Gross Monthly Income Before Taxes
• Total DTI: Total Housing Payment + Other Debts / Gross Monthly Income Before Taxes

As an example, a borrower with a monthly housing payment of $1,000, other debt payments of $1,000 and gross income of $4,000 would have a housing DTI of 25% ($1,000 / $4,000) and a total DTI of 50% ($2,000 / $4,000).

When calculating a DTI it is extremely important to have the income number correctly calculated to avoid disappointment when an underwriter goes to approve your loan.

As stated, Fannie Mae and Freddie Mac are set to decrease their maximum allowable total DTI from 55% to 45%. For this reason, home buyers need to make sure they stay within these much more restrictive limits because the limits are not flexible.

What are your options if your DTI ratio for the house you want to buy is too high? Home buyers can use the following strategies to help get into their dream home:

• A. Larger Down Payment. By making a larger down payment, your monthly payment will go down and so will your DTI.
• B. Mortgage Rate Buy down. Ask your mortgage loan officer about a permanent rate buy down to reduce your interest rate. A lower rate means lower payments and a lower DTI.
• C. Consider a Co-Signer. A co-signer who can add to your income without adding to much in additional debts can help reduce your DTI.
• D. Renegotiate with the Seller. In the buyer's market of today, you can always as a last resort go back to the seller and negotiate a price you can afford.

For a free mortgage pre-approval and an exact rate quote from an experienced mortgage loan officer, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

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