Modus Mortgage

What is DTI and How Does It Affect Your Mortgage?

Have you ever wondered why it’s so important to keep your debt under control while applying for a mortgage, or how debt affects your approval? This article will assist you in answering these basic questions, putting you in a strong position to get approved for a house loan.

What is Debt-To-Income Ratio (DTI)?

Because it directly effects the monthly payment you may qualify for, your debt-to-income ratio (DTI) is one of the most important indicators lenders examine to decide how much home you can buy.

The debt-to-income ratio (DTI) compares your current monthly payments to your total monthly income before taxes. Two types of calculations are employed in mortgage qualification, depending on the mortgage program and your qualification metrics:

Front-end DTI examines how much you spend on housing in relation to your entire income.

Back-End DTI examines installment and revolving debts

If you’re a bit more of a risk, the front-end DTI is applied on specified government loans. To qualify for an FHA loan with a credit score below 620, you’ll need a front-end DTI of no more than 38 percent. However, a back-end DTI is always calculated.

What Is a Good Debt-To-Income Ratio?

It’s advisable to keep your DTI at or below 43% as a general guideline. However, the actual maximum is determined by your other requirements as well as the type of loan you’re seeking.

You can have a DTI as high as 50% with a conventional loan from Fannie Mae or Freddie Mac, for example. However, your credit card usage will be considered by Fannie Mae. Someone with a similar credit history who simply makes the minimum payment on their credit cards is considered a lower-risk borrower. As a result, each of these borrowers’ DTI needs may differ. 

What Debts Are Included in DTI?

Not every payment is considered when calculating your DTI. Only items that appear on your credit report will typically be included in your DTI calculation, such as:

  • Mortgage payments
  • Home equity loans or home equity lines of credit (HELOC)
  • Car loans
  • Student loans
  • Personal loans
  • Child support or alimony payments
  • Credit cards

Utility bills, cell phone bills, and cable tv bills may not appear on your credit record, but they are still required to be paid on time. If these accounts fall into collections as a result of late or non-payments, your credit score will suffer.

Special Considerations for DTI Calculations

Student Loans

The way student loans are counted in your DTI calculation are determined by several factors. It depends on the sort of home loan you’re getting, as well as whether your student loan is under repayment, deferment, or forbearance.

Alimony Payments

When it comes to alimony, several rules apply. Assume you’re applying for a conventional, FHA, or VA loan. Alimony payments are deducted from your income rather than being listed as part of your debt in this scenario, which may make it easier for you to qualify. With a USDA loan or a jumbo loan, however, existing alimony payments are reflected in your DTI as debt.

You’re ready to apply now that you know more about your DTI and how it affects your mortgage qualification. To learn more about the best loan option for you and your DTI standing, get started online or give us a call.

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