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 (principle,
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 principle, 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 Guidelines
Overtime Income Guidelines
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 Guidelines
Follows the same rule as overtime.
Commission Income Guidelines
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 Guidelines
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 guidelines
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.
Required Mortgage Debt To Income Ratios
Conventional Loan Debt To Income
Fannie Mae and Freddie Mac prefer a maximum of 28% for the front
ratio and 36% for the back ratio. (28/36)
Non-Conventional Debt To Income
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 Loan Debt To Income
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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