Debt to Income Ratio

Mortgage debt to income ratios are the calculations underwriters use to determine whether a borrower can qualify for a mortgage. Debt to income ratios are used to determine if you have the capacity to repay your mortgage.

There are two calculations. The first or Front Ratio is your housing expense-to-income ratio. This is to say your proposed mortgage payment (principal, interest, taxes and insurance) divided by your gross monthly income.

The second or Back Ratio is your total monthly obligations-to-income ratio. This is your gross monthly payment including Mortgage PITI divided by your gross monthly income.

The only tricky part in determining your debt to income ratio is understanding what is and is not included in your total obligations and what can and cannot be included in your gross monthly income. Below is a list of things to remember when you are totaling all of your payments and all of your income. Then you can use the calculators provided here more efficiently.

Total Monthly Payments

Mortgage Payments

Include principal, interest, taxes, and insurance (PITI).

Installment Accounts

Do not count installment loans that have less than 10 months remaining. Except for Freddie Mac loans. They count everything.

Revolving Accounts, Credit Cards

Include the minimum payment on all open accounts.

Co-signed Loans

You will have to include these also unless you can show twelve months of cancelled checks from the person that is paying the loan and the loan must not have any late payments.

Child Support

Must be included.

Loans from a Previous Marriage

Must be counted if you are getting a conventional conforming loan. However, If your divorce papers clearly divide up the liabilities, FHA and non-conforming loans do not count them.

What Not To Include:

Utilities, telephone services, auto insurance, or childcare. (VA loans do include childcare.)


Gross Monthly Income

Overtime

Overtime cannot be counted unless you have been receiving it fairly consistently for two years and your employer will say that it is more than likely to continue into the future.

Bonus Income

Follows the same rule as overtime.

Commission

Normally commission requires a two-year history in order for it to be used. People changing from a salaried job to a commission job have tough times getting mortgage loans until they can show two years in the field. There are no-income verification loans on the market with slightly higher rates for people paid by commission.

Self-Employed Income

You must be self-employed for two years. Your usable income for a loan is the bottom line on your federal tax return AFTER all the deductions. There are things you can add back such as depreciation but to be perfectly honest, most self employed people have difficulty achieving the required monthly gross income because of all the tax write offs. Again, that is why it is so wonderful that there are non-conforming loans that allow higher debt to income ratios and no-income verification programs.

Child support

You can use child support if you can prove that you will receive it for an additional three years and you can prove that it has been paid on time for the last year. The only acceptable proof of payment is cancelled checks or a print out from the court if it is being paid through the court system.


Mortgage Debt To Income Limits


Conventional Loans

Fannie Mae and Freddie Mac prefer a maximum of 28% for the front ratio and 36% for the back ratio. (28/36)

Non-Conventional

FHA allows 31/43 and VA only uses the back ratio of 41% as a guideline. VA also calculates what they call Adequacy Of Effective Income and Balance Remaining for Family Support. This is a very complicated worksheet so I won't go into it here. Ask your Loan Officer or give me a call for more details.

Non-Conforming Loans

This term simply means they do not conform to the rigid, strict guidelines of conventional loans. Thank goodness! These loans usually only use the back ratio and I have seen them go as high as 55%.

Now you have all the information you need to get more accurate results from the calculators I have included for you on this site.

 

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