The Importance Of Debt To Income Ratio
Importance Of Debt To Income Ratio
Home buyers should realize the importance of debt to income ratio when qualifying for a home loan. Credit and income are the two leading factors when qualifying for a mortgage loan, however, income is what determines the debt to income ratio. You can have prior bad credit and lower credit score but as long as you have income, you will qualify for a home loan. However, on the flip side, you can have the highest credit scores in the world, have perfect payment history without a single late payment, have plenty of assets to put down on your home purchase, but if you have no income to document or very little income, then you cannot qualify for a home loan. All mortgage loan programs have debt to income ratio limits. FHA debt to income ratio requirements are the most generous out of all mortgage loan programs. FHA Loans allow up to 56.9% DTI for borrowers with a 620 FICO credit score or higher. For borrowers with under 620 FICO credit scores, the maximum FHA debt to income ratio requirements is 43% DTI. Fannie Mae requires debt to income ratios up to 45% DTI on conventional loans.
Mortgage Loan Borrowers applying for mortgage loan think that the credit scores is the most important factor associated with getting a mortgage loan approval. More importantly than the credit scores and the down payment required on a home purchase is the debt to income ratio, also referred to as DTI.
Importance Of Debt To Income Ratio: What Is DTI?
Mortgage Lenders measures the ability of mortgage loan borrowers to make timely payments on their home loan by analyzing the borrower’s debt to income ratio. The debt to income ratio of a mortgage loan applicant is expressed as a percentage and is calculated by dividing the sum of all of the minimum monthly debt payments such as credit card payments, auto loan payments, student loan payments, installment loan payments, proposed P.I.T.I. ( principal, interest, taxes, insurance ), and all other recurring monthly debt of the borrower by the borrower’s gross monthly income. That percentage is the borrower’s DTI.
When getting qualified for a home mortgage loan, debt to income ratio is the deciding factor on how much home you will qualify for. Mortgage lenders will only accept documented income and cash income does not count. For example, your paycheck counts a documented income since your employer takes taxes out and gives you W-2s at the end of the year. Cash income you earn from a part time job will not count in debt to income ratio calculations since the cash is not documented. Part time income, bonus income, and overtime income can be used for qualifying income, however, you need at least 2 years of steady part time income, overtime income, and bonus income in order for it to count. Social security and pension can also count as qualified income in mortgage income qualification.
Mortgage lenders will require two years tax returns from all mortgage loan borrowers. All unreimbursed expenses will count against your gross income and the adjusted gross income will be used as qualified income.