When you apply for a mortgage, debt income ratio or debt to income is one of the three factors, lenders look at.
How debt-to-income is calculated?
- there are two debt-to-income ratios, front and back
- front ratio is calculated by dividing your gross monthly income by your housing expenses - those include principal, interest, real estate taxes, homeowners insurance, mortgage insurance (PMI) and association fees - the latter two you may or may not have and if you have condominium association, insurance is often included in association fee
- when calculating back ratio your monthly consumer debt payments are also included like payments for your cars, credit cards, installment loans including student ones, second mortgage, etc.
- note that loans you cosigned for are also counted
General guidelines
General acceptable debt-to-income ratios is 33/38 meaning that housing expenses can't exceed thirty-three percent of your monthly income. Your total monthly payment can take no more than thirty-eight percent.
These guidelines can be very flexible. Make a nice down payment, say 30% and debt to income ratio suddenly looks a bit more extendable and if credit score is over 700, debt to income extends even more. You can go as high as 45/45.
The guidelines also vary according to loan program. FHA guidelines accepts a 29/41 debt to income ratio. VA guidelines do not have a front ratio at all, but back ratio is 41. Certain programs designed for teachers, policemen, firefighters specifically allow these high ratios. Also there are stated income programs, also called no ratio that allow you do just that, state your income without any supporting documentation. Of course if you are janitor you can’t say you make $100,000 but $35,000 instead of $20,000 can be acceptable. There is a interest rate hike for stated programs.
Example
You gross (before taxes) $3,000 a month. With 33/38 debt to income ratio, your maximum monthly housing cost can't exceed around $1,000. Your total payments can't go higher than $1,150. With 45/45 debt to income ratio you can go up to $1,350.
