Debt to Income Ratio
Debt to Income Ratio - There are two ratios that most lenders use to determine your ability to repay a loan. One is referred to as your "back-end". This ratio is basically your total debt to income ratio. The second ratio is referred to as your "front-end". Usually, this ratio is considered your housing expenses to income ratio.
Most lenders now days will mainly be concerned with your back end ratio. 41% or below will fall into the conforming lending guidelines. Subprime lenders may even go up to 55% ratio. You will need a mortgage professional to pull credit and look at your income to calculate the ratio for you.
Include all of your documentable income sources on your loan application. Ber sure to include sources such as child support, social security and similar types. They all can be figured into the final DTI and may greatly affect your final interest rate.
The ratio of the your total monthly obligations, which includes housing expenses and recurring bills, in relation to your monthly income. Lender use this to decide your ability to repay the mortgage and all other debts. Your DTI ratio is an important factor in deciding the loan amount you can qualify for. It shows your qualifying ratio, or your financial capacity to pay the mortgage, in addition to your other bills.
Factoring your debt to Income Ratio is one of the basics involved in determining a borrower's risk profile for a mortgage loan. Borrower's who have a low debt to income ratio will have much greater discretionary income and pose a lower lending risk. Borrowers with a high debt to income ratio will be considered a higher risk.
Debt to Income Ratio is usually all your total payments divided by your total monthly income. Lenders usually allow exceptions to this by not counting certain accounts such as deferred student loans, accounts with less than 10 monhtly payments remaining and accounts the applicant can prove are paid by someone else.
Not too long ago in the mortgage industry, the Debt-to-Income ratios are expressed in two sets of two digit figures, such as 28/36, in which 28 represents a "front end" ratio of 28% of total income and 36 means a "back end" ratio of 36% of income. Nowadays, banks are more concerned about the "back end" ratio and all but disregard the "front end" ratio. Most have also raise the "back end" ratio to over 40%. In other words, mortgage banks are now allowing borrowers to use 40% or more of their monthly income to qualify for home financing, provided they have no other debts.
Gross income is used in determining your Debt-to-Income ratios. Gross income is the monies you have earned before you pay taxes, this number is usually substantially higher than the money you deposit in your bank account every week.
Sometimes a lender will determine that your debt-to-income ratio is too high for you to qualify for a mortgage. Often, you can still qualify if some debts are paid off prior to or at closing.
If you have student loan payments that are deferred, ask your preferred Mortgage Professional about having this payment excluded from your debt to income ration.
Do not be afraid to apply if your debt ratio exceeds that standard quotas as electronic underwriting has approved debt ratios in the 60 to 70 percent range and equity in the property, excellent credit history and/or sufficient assets all help in getting this through.
The debt to income ratio is a control the lender uses to offset and measure risk. The higher the DTI the higher the risk. The higher the risk the higher the rate, or the lower the LTV.
High debt to income ratio mortgage loans - Many people have high debt to income ratios and can still qualify for a mortgage loan. There are many options available out there for people who have a high debt to income ratio, also referred to as DTI. One solution to a high debt to income ratio is to work with a lender that allows for a high debt to income ratio. Typical good credit lenders allow for debt ratios around 40%, although many times an automated underwriting system may qualify borrowers with a much higher DTI too. Typical below average credit score lenders will allow a maximum debt to income ratio of 50%. Then there are even a few other lenders who will allow debt to income ratios up to 55%, and sometimes even 60% on rare occasions. Consult a mortgage broker today to find the right lender for your individual situation.
Paying off high payment credit card and car loan accounts as part of a debt consolidation or cash out refinance is a great way to qualify for a lower rate mortgage.
There are also no ratio loans that some lenders can provide.
There are also programs available for high credit score borrowers called No Doc loans. This is when a lender does not require income information from the borrower and will base the loan on the creditworthiness of the borrower.
If you are doing a mortgage refinance it may be possible to consolidate some of your other debts, such as credit cards, car loans, etc. into your new mortgage. By eliminating your other monthly debt payments, leaving you with just your new mortgage payment, you might find that this significantly lowers your debt to income ratio.
Even if you make more than enough money to comfortably pay for the mortgage you may find that you have to look at some of these other types of loans because the lender will not accept all of your income. Some examples would be a 2nd job, commission income, or bonuses that you have been receiving less than 2 years. Lenders may also not include rental income you receive if you rent out rooms in your home and do not have a signed lease, or proof of 12 months payments received.
If you fall into one of these categories you may need to look at a loan that allows a high debt to income ratio, even though your actual income may be more than sufficient to qualify.
Having a high debt to income ratio no longer means you are forced to accept the high rates and unfavorable terms of many subprime loans. If you have sufficient compensating factors, such as a perfect mortgage payment history and high credit scores, you may be able to qualify for a loan only slightly more expensive than someone with a low debt to income ratio. Be sure to ask your loan officer to submit your loan to various Automatic Underwriting programs prior to accepting a high rate subprime loan.
On higher debt-to-income ratio borrowers, a lender will sometimes require a certain amount of disposable income before approving this high debt ratio loan. Disposable income is calculated by taking the gross monthly income minus the monthly liabilities. If the borrower has a large amount of disposable income, say $3000 a month, then the lender is more likely to approve the loan.