When applying for a mortgage loan, lenders keep track of several important ratios and numbers to qualify a borrower. One of the most important calculations is a borrower’s overall Debt-To-Income ratio or DTI. The DTI ratio is made up of a borrower’s gross total monthly debt payments divided by their gross monthly income.
Gross income is how much is earned earned before taxes and other deductions. When calculating the DTI, lenders will use the mortgage payment for which you are applying into their monthly debt payments.
For example, if a borrower is applying for a mortgage with a payment of $2,000/month, and assuming that they have a car payment of $250/month, and credit card payments of $100/month, their monthly debt payment is now $2,350. If a borrower’s monthly gross income is $6,000, then their DTI is 39.17% ($2,350 in Total Monthly Expenses / $6,000 in Gross Monthly Income = 39.17% DTI ratio).
The total outstanding balance of the car loan or credit card is not taken into consideration when calculating the DTI ratio, as it is strictly a function of a borrower’s monthly income to expenses.
Mortgage lenders use the Debt-To-Income ratio to gauge a borrower’s ability to pay the full mortgage payment each month. While the exact limit varies from lender to lender and by loan type, a commonly accepted DTI limit is up to 43%.
At Bluefire Mortgage Group, we are much more liberal in our loan underwriting practices and we typically underwrite our loans at a DTI ratio of upwards of 50% for a Conventional mortgage loan (FHA and VA loans have a significantly higher DTI allowance).
For more information about Debt-To-Income ratios or to better understand how mortgage loan approvals are determined, give us a call at (760) 930-0569.