When you apply to a lender for a mortgage loan, you are likely asking the institution to grant you hundreds of thousands of dollars. When you think about the process in this regard, it should be easy to see why the process comes with a certain level of scrutiny. One of the factors that lenders often comb over is the applicant's debt-to-income ratio or DTI. If you have plans to apply for a mortgage, you want to make sure you familiarize yourself with this topic.
Understanding DTI
The debt-to-income ratio seems complicated, but it is quite simple. In short, it is an assessment of your total expenses against your income. Generally, the expenses that are factored into this equation are all of those that appear on your credit report such as a monthly mortgage payment, homeowner's insurance, homeowner's association expenses, and taxes.
However, with certain loan programs, staple expenses, such as child support and utility payments may also be factored in. If you are applying with someone else, both of your expense totals and income are combined.
Calculating DTI
Your DTI is determined by dividing your expense total by your income. For example, a person with $1,250 in monthly expenses, and $5,000 in monthly income will have a DTI of 25%. The reason this figure is so important is that it helps determine how much you can realistically afford in a mortgage payment, and ultimately, the amount of mortgage loan you can afford to pay back.
Traditionally, lenders like borrowers who have a front-end ratio—which includes the amount before mortgage expenses are included—and a backend ratio after the mortgage costs are included.
Not a Deal-Breaker
If your DTI does not fit into this spectrum, it does not have to be a deal-breaker. Each lender will have their overlays, which are, in short, guidelines that they can apply to their specific loan options. As a result, some borrowers with a ratio above 36% may be approved.
You should also keep in mind that DTI is just one element of the approval process. An applicant with a large number of reserves in their savings and a good credit score may have more wiggle room on the DTI scale than someone with no savings and a lower score.
If you want to assess your preparedness to apply for a mortgage, remember a mortgage loan professional can help you with more than applying for the loan. Do not hesitate to reach out and ask whatever questions you have. For more information, contact a company like GeoVista Federal Credit Union.
Share2 February 2021
One thing I have always been good with is money. Even in high school, I always had a savings from my allowance and from working for the neighbors. I created this blog to help other young people understand the importance of financial responsibility even at a young age. If we start our adult lives knowing about financial responsibility, we can make it further in our lives before we suffer from the devastation of financial mistakes that can take years and years to pay back. Hopefully, what you learn here will help you avoid those financial mistakes and maybe help you recover from the ones you've already made.