Debt To Income Ratio

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Debt To Income Ratio
A Debt to Income Ratio is a calculation used to determine if the income of a potential borrower qualifies for a mortgage loan.

Often times you may need to pay off some of your debts, such as high credit card balances, in order to reach a qualifying debt to income ratio.

The way to calculate your own Debt to Income Ratio is to take all of your monthly debt payments (minimum credit card payments, car payments, student loan payments, current &/or proposed mortgage payments including taxes and insurance) and divide that number by your monthly income.

For example, if the total of your credit card payments, student loan payments and mortgage payment equals $4,500, and you make $10,000 a month, then your Debt to Income ratio is 45%.

The two main kinds of debt to income ratio are expressed as a pair using the notation x/y (for example, 28/36).

Debt to Income (DTI) has two ratios that lenders look at in determining whether to approve a loan. The front end is the housing expense divided by income. The back end is all monthly debt divided by income.

Often times, a borrower's debt to income ratio is high because the borrower has income from sources that the underwriter will not allow to be considered. An example of such sources are room rents, tips, side businesses and so forth. In this case the borrower must use a stated or no ratio type of loan program. When I review your individual situation, I can tell you which of these types of programs are best for you and how you can qualify for them.

The income that is used in calculating your Debt to Income Ratio is the Gross Monthly Income, before taxes.

There are many mortgage loan programs where Debt to Income Ratios are not used at all.

Some of these loan programs include what is known as a No-Ratio loan (short for No Debt to Income Ratio), a No Income No Asset loan (also called a NINA), and a NoDoc loan.

These loan programs are beneficial for those who would have a hard time documenting their income, such as from a cash paying job, or for those people who would like to alleviate alot of the paperwork involved in a traditional mortgage.

All lenders are comfortable with a Debt to Income Ratio under 40%. But there are many lenders that can go as high as 55%, and sometimes even higher.
To see what you can afford, or for help calculating your Debt to Income Ratio call Dave Zwierecki at 888-418-4467.

Deferred Student Loans may or may not be included in the Debt to Income Ratio depending on the particular loan program that you are attempting to qualify for. Other factors such as how long the student loan payments are deferred for may be an issue as well.
Make sure to ask your Mortgage Professional about deferred student loans, if this applies to you.

It is important to remember that responsible lending requires that a lender give strong consideration to a borrower's debt to income ratio. The last thing that any responsible lender wants to do is give a borrower a loan that they will have trouble making payments on. Lenders place parameters on debt to income ratios to be sure that a borrowers can comfortably make their mortgage payments.

A Debt to Income Ratio is not the only calculation used in mortgage financing.
Even if your debt to income ratio may be high there may be other compensating factors that will allow you to qualify for a mortgage loan.

If you own a business, certain expenses which are in your name on your credit report, but which are used for business purposes, can be removed from your personal debt to income ratio by having your business bank account pay those bills. For example, you may have a leased car or truck in your name, however it is used for business purposes. Pay the bill from a business bank account and we can ignore it when calculating debt to income ratios. This also works with cell phone bills and in certain cases with unsecured loans and alines of credit written in your name.

Debt to Income ratio is used to determine your ability to pay back the mortgage. The percentage that is "normally accepted by most subprime companies is 50% of your gross income. This number is very misleading because that only leaves you 50% of your gross income to pay for your taxes, utilities, gas, insurance, groceries, etc. This does not leave a lot of breathing room. If you are close to 50% debt ratio, you should find a way to rapidly pay off all of your debt in a short period of time.

Very often there are items on your credit report that are being calculated into your Debt to Income Ratio incorrectly for a variety of reasons. One common reason is due to the account not reporting correctly to the credit bureaus. Often there are items showing up as current accounts with a balance that have in fact been paid down, or paid off in the past. This is easy to correct through an update by the credit report company. It is important to go through every open line in your credit report with a mortgage professional.

When financing or refinancing an investment property, especially when the borrower owns more than one investment property, there is more than one way to calculate the borrowers Debt To Income Ratio. It really depends on the lender that is underwriting the loan. Contact Dave Zwierecki at 888-418-4467 or for more information.


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 Information listed above is to be used for educational purposes only and is not guaranteed

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