In this blog, we will cover and discuss how to calculate debt-to-income ratio on mortgage loans. There are two types of debt-to-income ratios when it comes to debt to ratio requirements. The first is front-end debt-to-income ratios and the second is back-end debt-to-income ratios.

Front-End and Back-End Debt-To-Income Ratio

The front-end debt-to-income ratio is also known as the housing expenses debt-to-income ratio which is the sum of the mortgage interest and principal payments, monthly property taxes, mortgage insurance premium, homeowners insurance, and homeowners association dues if any divided by the borrower’s gross monthly income. In this article, we will cover and discuss how to calculate debt-to-income ratio.

Automated Underwriting System Approval

To get automated approval by the Automated Underwriting System for FHA Loans, the front-end debt-to-income ratio cannot exceed 46.9% and the back-end DTI cannot exceed 56.9%. The maximum DTI on Conventional Loans for an approve/eligible per AUS is 50%. VA Loans do not have a maximum debt-to-income ratio requirement. I have gotten approve/eligible per AUS on VA Loans with 580 credit scores and 60% DTI. Monthly utility payments such as the following:

• Cable bills
• Internet bills
• Water bills
• Other bills

The above types of bills that are not reported on credit bureaus are not included in qualifying for the front-end debt-to-income ratios. The back-end debt-to-income ratio is the sum of the total housing payment plus all other monthly payments such as automobile payments, credit card payments, student loan payments, and other monthly minimum credit payments divided by the borrower’s gross monthly income.

Importance of How To Calculate Debt-To-Income Ratio

To get automated approval per the Automated Underwriting System on FHA Loans, maximum back-end debt-to-income ratios cannot exceed 56.9%. However, there is a big difference between what mortgage loans qualify for and what homeowners can comfortably afford. Mortgage underwriters do not take other bills that do not report on the credit report as part of the borrower’s DTI. Borrowers’ expenses such as the following are not taken into account in How To Calculate Debt-To-Income Ratio:

• Auto insurance
• Utilities
• Landscaping
• Snow Plowing
• Child Care
• Elderly Care
• Children’s Extra-Curricular Activities
• Breakdowns and Maintenance

Do not be in a situation where a homeowner is house-rich and cash poor.

How To Calculate Debt-To-Income Ratio Versus Ability To Repay

A mortgage lender will qualify borrowers for the maximum monthly mortgage payment they qualify for under the income and credit profile they have on hand. However, can a new homeowner afford the monthly mortgage payment the lender qualifies them for?  Remember that lender is not taking into account the full monthly mortgage payment of housing expenses such as the following:

• Water bills
• Electric bills
• Gas bills
• Internet bills
• Cable bills
• Landscaping bills
• Other monthly maintenance bills

Homeowners also need to consider other monthly expenses such as entertainment, groceries, children’s extracurricular activity expenses, and other expenses that lenders did not use. Homeownership is the American Dream and the purpose of being a homeowner is to enjoy it and make life comfortable for them and their families. This will not be the case if you have to spend every extra dollar into paying your home’s monthly mortgage payment.

Mortgage Payment: Need To Consider Reserves

Homeowners also are responsible for the maintenance and repairs of their own homes. Lenders do not make reserves as a mandatory requirement but unexpected repairs do come up and some of these repairs can be extremely costly. We are currently experiencing severe weather in the Midwest and East Coast where temperatures are at sub-zero.

Many homeowners are experiencing plumbing issues and heating issues. If the furnace goes out, costs can be very high, sometimes more than a thousand dollars. Frozen pipes bursting is another issue homeowners are going through right now due to the extremely severe weather. Some homeowners need to shell out several thousand dollars to correct these repairs. These repairs are not covered by homeowners’ insurance.

Debts Reporting on Credit Report Versus Personal Debts of Borrowers

How To Calculate Debt-To-Income Ratio only includes debts that borrowers have reported on the credit reports. The way How To Calculate Debt-To-Income Ratio with regard to income is for underwriters to take into account gross income and not net income.

There are many times when borrowers get approved for mortgage loans when they cannot afford them. With the excitement of buying a new home and moving in to a new neighborhood, many homebuyers do not take into account that buying a new home also comes with the expenses of being a property owner. Things do break and many mechanical items such as furnaces, refrigerators, and freezers can cost thousands of dollars. My refrigerator just broke and needs to be replaced. A good new refrigerator can cost $5,000.

Reserves For Homeowners

Reserves for homeowners are not a lender requirement. Homeowners should set aside a separate reserve fund in cases of emergency. Homeowners need to consider that just because they qualify for a mortgage loan does not mean they can comfortably afford it. Affordability is the homeowners’ call and no lender can tell them whether they can afford it or not.

Underwriters will just qualify borrowers for the mortgage loan they request to see if they meet the lender’s guidelines on the debt-to-income ratio. Please consider overall finances including reserves before accepting loan commitment and go through mortgage loans to see whether mortgage payment will not be stressing the household monthly budget.

Overlays on How To Calculate Debt-To-Income Ratio From Mortgage Lenders

Most lenders will have overlays on debt-to-income ratios where they will cap it at 45% to 50% on FHA Loans. However, FHA Guidelines on DTI is 46.9% front end and 56.9% back end to get approve/eligible per AUS on FHA Loans. Borrowers who need to qualify for FHA Loans with a direct lender with no overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.