Debt to Income Ratio or DTI
The DTI is an important element for qualification for your loan and is focused on your monthly obligations relative to your Gross Monthly Income. The obligations of concern are things like car loans, credit card payments, student loans or other installment or revolving accounts including child support payments. Those monthly obligations are then divided by your Gross Monthly Income or GMI. For example, if you have $2,500 dollars a month in monthly obligations (including your new house payment) and your income was $5,000 dollars a month, your Debt-to-Income ratio would be 50%.
Debt limit
There is generally a debt limit associated with each type of loan. These qualifying ratios are guidelines and large assets or an excellent credit history can help you qualify for a mortgage loan even if your debt load is higher than desireable.
Understanding the qualifying ratio
Typically conventional loans have a qualifying ratio up to 50%. Usually an FHA loans have a lower debt load, reflected in a lower qualifying ratio usually around 43%.
In fact, there are two numbers that make up the DTI. One is the house payment it self and the other includes all debt with the house. The larger is the one that includes all the debt and is described above. Below, we’ll explore the total Debt-to-Income story:
Lets take the example of a given DTI ratio of 28/36.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner’s association dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.
For example:
With a 28/36 qualifying ratio:
- Gross monthly income of $3,500 x .28 = $980 can be applied to housing
- Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
Simply guidelines
Remember these are just guidelines. We’d be happy to pre-qualify you to determine how large a mortgage loan you can afford.
