What is a Debt to Income Ratio (DTI)?

When applying for a home loan, whether a purchase or refinance, mortgage lenders, evaluate borrowers’ debt to income ratios or DTI. The DTI is a formula that determines what percentage of the gross monthly income goes toward paying monthly debt obligations. The DTI allows the mortgage lender to see if borrowers can afford the new monthly payment.

• Monthly debt obligations divided by gross monthly income equals debt to income ratio (debt/income=DTI)

• Monthly debt obligations include rent/mortgage, credit card minimum payments, loan payments, student loan payments

• Gross monthly income is a borrower’s income before taxes or deductions

Though it is not difficult to calculate, many borrowers fail to account for all of their monthly obligations when plugging in numbers. It is essential to include all accounts with balances. To ensure you capture all of them, borrowers should get a recent copy of their credit report. A free copy is available once a year through a government-sponsored program, and you can get one by clicking here. As a mortgage loan officer, I also pull a credit report during the application process. I will be able to determine the borrower’s DTI at that point.

Large banks are typically looking for a DTI at or below 35%. Working with a mortgage broker unlocks many options that big banks don’t usually offer and routinely work with borrowers who have DTIs up to 43%. There are even specialty programs that can go above that. These will cost a little more in terms of rates and fees but can help some borrowers get into a home or refinance when they otherwise would be out of luck.

If you are ready to buy or refinance, give me a call, and we will make sure we understand your entire financial picture and find the loan that fits your needs. If it turns out that the time is not right, we will develop a plan to get you there. After all, who can you trust if you can’t trust your mom? The Mortgage Mom that is!