A "good" DTI isn't too difficult
Your debt-to-income ratio (DTI) is one of the most important factors in qualifying for a mortgage.
DTI determines whether you are eligible for the type of mortgage you want. It also determines how much house you can afford. Of course, you want your DTI to look good to a lender.
Fortunately, it's not too difficult. Mortgage programs today are flexible, and a wide range of debt-to-income ratios fall in or near the good category. So there is a good chance you will get approved as long as your debt is manageable.
Check Your Mortgage Eligibility (March 22, 2021)
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What is a good debt to income ratio?
Different mortgage programs have different DTI requirements. And lenders can also set their own maximums. So a “good” debt to income ratio can vary depending on your circumstances.
In general, you want a debt-to-income ratio of 36 percent or less, but no more than 43 percent. This is how lenders typically see DTI:
36% DTI or lower: Excellent 43% DTI: Good 45% DTI: Acceptable (depending on mortgage type and lender) 50% DTI: Absolute maximum *
* Some programs, such as the FHA loan and the Fannie Mae HomeReady loan, allow a DTI of up to 50%. However, you will likely need "offsets" such as a higher credit score or a higher down payment to qualify
Brian Martucci, Mortgage Expert at Money Crashers, notes that a 36 percent rate is often cited as the limit below which your DTI is considered "good".
However, you don't need a DTI below 36% to qualify. In fact, it's more common for lenders to allow a DTI of up to 43%.
A “good” DTI is less important than a DTI that matches your personal finances and buying goals
Review your eligibility to buy a home (March 22, 2021).
The 43% DTI rule for mortgages
The most common type of loan for home buyers is a compliant mortgage backed by Fannie Mae or Freddie Mac.
To qualify for a compliant loan, most lenders require a DTI of 43% or less. Ideally, you want to keep your brand under that brand. (This is sometimes called the "43% rule".)
Jared Maxwell, vice president and director of direct sales for Embrace Home Loans, said, “Every homeowner's situations, goals, and future income opportunities are different. However, a rate less than 43 percent will usually help you qualify for most loan programs. "
“This means your monthly debt can only be 43 percent of your gross monthly pre-tax income,” said Ralph DiBugnara, President of Home Qualified.
DTIs higher than 43%
It may be possible to get a permit with a debt-to-income ratio of over 43%.
"Historically, a DTI rate of 45 percent was the maximum acceptable DTI for Fannie Mae loans, which meant it was very difficult to qualify for a conventional mortgage above that threshold," says Martucci.
"But in 2020, Fannie Mae increased his maximum DTI to 50 percent to give overburdened borrowers more leeway."
These higher DTI certificates can be of great help to lower income and / or high debt borrowers (e.g., those with high student loan payments).
However, you also need to consider the impact of maximizing your DTI.
If you're approved with a 50% DTI, half of your monthly pre-tax income goes into your mortgage and other debt. That number will feel even higher after taxes are deducted.
You can decide whether the qualification with the maximum DTI makes sense for you. If not, remember that you don't have to use the full allowance. The most important thing is that you have a housing benefit payment and monthly budget that you are happy with.
Check Your Budget For Home Buying (March 22, 2021)
The debt to income ratio requirements vary depending on the loan program
Note that according to Martucci and Dave Cook, loan officers at Cherry Creek Mortgage, each loan may have different maximum DTI ratio limits.
Typically, the maximum DTI for each of the major loan programs is as follows:
Conventional Loans (supported by Fannie Mae and Freddie Mac): Maximum DTI from 45% to 50%FHA loan: Maximum DTI of 50%VA loan: No maximum DTI was given, although VA loan applicants with higher DTIs may have an additional check USDA loan: Maximum DTI from 41% to 46%Jumbo Loans: Maximum DTI of 43%
"In general, borrowers should have a monthly debt ratio of no more than 43 percent to be purchased, guaranteed, or insured by VA, USDA, Fannie Mae, Freddie Mac, and FHA," adds Maxwell.
"However, if borrowers meet certain product requirements, they may be allowed to have a DTI ratio greater than 43 percent."
How to qualify with a high DTI
If you have a DTI above 43%, it may be more difficult to qualify for a mortgage loan. And if approved, your loan may be subject to additional underwriting that can result in a longer close time.
Overall, higher DTI rates are seen as a higher risk when an insurer is reviewing a mortgage loan for approval.
"In some cases, when the DTI is found to be too high, the lender will need other offsetting factors to approve the loan," explains DiBugnara.
He says that compensating factors can include:
Additional savings or reserves Evidence of on-time payment history on utility bills or rents A letter of explanation explaining how an applicant can make (mortgage) payments
A higher credit rating or a higher down payment can also help you qualify.
Cook notes that with traditional loans, FHA and VA loans, your DTI ratio is basically a pass / fail test that shouldn't affect the rate you qualify for.
"However, if you have a down payment of less than 20 percent on a traditional loan that requires you to purchase mortgage insurance, your DTI ratio can affect the cost of that mortgage insurance," added Cook.
In other words, the higher your DTI, the higher your Private Mortgage Insurance (PMI) rates.
How to calculate your DTI
To find your debt-to-income ratio (also known as the "back-end ratio"), first add up all of your monthly debt payments.
Monthly debt for DTI includes:
Future mortgage payments for the home you want (an estimate is fine *) Automatic loan paymentsStudent loan payments Personal loan payments Debt consolidation loan payments Any other installment loans you pay monthlyCredit card payments and other revolving lines of credit (use your monthly minimum payment) AlimonyChild Support
* When estimating your monthly mortgage payment to calculate the DTI, make sure it includes property taxes and homeowner insurance. You can use a mortgage calculator with taxes, insurance, and PMI to see your “real” payment
Your DTI calculation should NOT include it::
Rent Payments Utilities Cell Phone Bill Internet Bills Business Other non-indebted expenses that are not listed on your credit report
Next, divide the total of your debt by your "gross unadjusted monthly income." This is the amount you earn each month before taxes and other deductions are deducted – also known as your “pre-tax income”.
Then multiply that number by 100.
(Sum of monthly debts / monthly pre-tax income) * 100 = your DTI
For example, let's say your monthly debt cost is $ 3,000. For example, let's say your gross monthly income is $ 7,000.
$ 3,000 ÷ $ 7,000 = 0.428 x 100 = 42.8
In this case, your debt-to-income ratio is 42.8% – exactly within the 43% limit most lenders allow.
Front-end DTI vs. back-end DTI
Note that lenders will check the front-end and back-end ratios of your DTI.
"Your front-end quota is simply your total mortgage payment divided by your gross monthly income," says Cook.
Most lenders want a front-end rate of no more than 28%. This means that your housing costs – including capital, interest, property taxes, and homeowner insurance – will not exceed 28% of your gross monthly income.
"But for the most part," says Cook, "the front-end debt ratio isn't the number that matters most to underwriting." Most credit insurance programs today deal primarily with the back-end debt ratio. "
Check Your Budget For Home Buying (March 22, 2021)
Tips to Keep Your Debt-To-Income Ratio Low For Qualifying For Mortgage
Are you concerned that your debt-to-income ratio will prevent you from being eligible for a mortgage loan?
You can follow these tips to lower your DTI and improve your chances of getting mortgage approval:
Contact one or more lenders before applying for a loan. "Get advice on your home payment amount and the debt-to-GDP ratio for the loan product you choose," suggests Cook. "Ask about your best plan of action to manage your debt."Do your homework. “Have a solid understanding of how your DTI rate affects your ability to take out a mortgage. And understand your financial goals as well as the specific debts that can be paid off in order to achieve those goals, ”recommends MaxwellLower your monthly debt obligations. "Temporarily prioritize debt payments over savings and investment account contributions, apart from any employer-sponsored plan contributions that you must make in order to qualify for your employer match. Throw as much money as possible into smaller debt balances that you can quickly zero out, ”advises Martucci. "Eliminating these payments and accounts will decrease your DTI rate."Avoid overusing your credit cards and build up credit. Pay off your monthly credit card debt in full instead of just making the minimum payment. Keeping your credit utilization low and minimizing your balance relative to your overall credit card limits can lower your DTI and improve your credit score. This is a double punch in your loan applicationDo not take out new loans before buying a home. As with a car loan, as you take on new debt, your DTI will increase. This can significantly reduce your home buying budget. Whenever possible, you want to avoid making new monthly payments in the years leading up to your home purchase
Even if your DTI is in the “good” range for qualifying mortgages, it doesn't hurt to lower it before applying.
The lower your existing debt, the more you can spend on your mortgage.
If you work on improving your debt to income ratio before applying for a home loan, you can qualify for a bigger, more expensive home.
Check your mortgage eligibility
By estimating your DTI, you can find out if you qualify for a mortgage and how much home you can possibly afford.
But any number you come up with is just an estimate. Your mortgage lender has the final say on your DTI and home purchase budget.
If you are serious about getting started with buying a new home, you will need pre-approval for a mortgage to check your eligibility and budget. You can get started here.
Check your new plan (March 22, 2021)