What is DTI and why does it matter so much?

Your Debt to Income Ratio will what programs you are eligible for and how much you qualified for.

DTI = Monthly Debt (recurring) / Monthly income (gross)

Recurring Debt

Recurring debt is monthly obligations that are due every month as reported on credit reports. These can be Revolving Accounts such as credit cards which are variable in monthly amounts due or Installment Accounts which have a set payment and period such as auto loans. When reviewing your DTI it is important to look at ways to decrease your DTI ratio by reducing balances on revolving accounts and/or paying off installment accounts if possible. The earlier you review your credit reports the more time you will have to work on an effective strategy of improving your Debt to Income ratio.

Important: Monthly debt will factor in new mortgage payment including taxes, insurance, and any HOA fees or dues regardless of if they are escrowed into the payment.

Gross Income vs Net Income(Taxable Income)

Changing your DTI by addressing your debt is usually much easier than increasing your income. Therefore, it is important to have a solid understanding of how your qualifying income will be determined.

  • Gross Income - For regular salary , hourly, and most all W2 employees the qualifying income used is typically the gross amount. This is the amount of income before taxes, insurance and other benefits are taking out.

  • Net Income - Being self employed provides for different ways of deducting and writing off business expenses. These tax strategies are helpful when filing taxes however they are also taken into account during underwriting. Usually an underwriter will only use your net income. Most times it will be similar to the taxable income however there are certain calculations that can add to or subtract from the qualifying income. Additionally, the most recent 2 years tax returns is the standard used to calculate income for self employed borrowers.

What is an acceptable DTI ratio ?

It all depends on the loan program.

Some #government backed loans will allow up to around 55% (sometimes slightly higher).

Other #conventional loan programs may be eligible up to around 50% ratio.

While many will look for around 45% maximum ratio. Lenders will also have their own overlays which may be stricter or looser than other lenders.

Because the DTI ratio on most programs (VA excluded) do not look at residual expenses it is very important to factor into your monthly affordable payment regardless of the DTI.

For example if my DTI is 45% but that does not factor in child care, club dues, activity expenses etc. then the monthly payment may not ultimately be affordable.

So your DTI ratio need to be acceptable to you before it is acceptable to bank.