Debt to Income Ratio on Home Loans

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When an Arizona mortgage lender evaluates a prospective borrower’s mortgage application, one of the main elements used to approve or decline each borrower is something called a “Debt to Income Ratio.”

What is Your Debt to Income Ratio? 

Lenders use your Debt to Income Ratio (or “DTI” for short) to analyze your income and debt.   Each different type of Arizona mortgage (Conventional, FHA, VA, USDA, Jumbo etc..) sets a maximum allowable Debt to Income Ratio limit which is expressed as a percentage (see below for more).   Your Debt to Income Ratio must be at or below the maximum DTI limit in order to be approved.

How is Your Debt to Income Ratio Calculated? 

Debt to Income expresses a buyer’s monthly debt as a percentage of their gross (not net) income.  The way that Arizona Mortgage lenders calculate debt to income is very straight forward and simple.  Lets take a look!

Borrower’s Debt to Income Ratio = Borrower’s Total Monthly Debt/Borrower’s Gross Monthly Income

Example Debt to Income Ratio calculation:

  1. $8,000 in gross monthly income
  2. $1,500 in monthly debt w/out new mortgage payment
  3. Applying for a mortgage with a $1,500 monthly payment
  4. Monthly debt equals $3,000 when mortgage payment is included ($1,500 in existing debt +  $1,500 in new mortgage debt)
  5. Debt to Income Ratio = 37.5%  ($3,000 total monthly debt/$8,000 gross monthly income = 37.5% Debt to Income Ratio)

Arizona mortgage lenders include the minimum required monthly payment for every debt on your credit report.  In addition, lenders add your new monthly mortgage payment to your deb to income ratio as well.  Note that any Arizona loan officer considers the monthly payment for all the debt that shows up on a borrower’s credit report and NOT the actual amount owed.  For example, if a borrower has a $30,000 car loan with a $600 monthly payment the lender will look at the $600 monthly payment NOT the $30,000 loan balance.

Rental Property Note – The expenses and revenue that a borrower may have for  any rental property they own is also a factor in the Debt to Income Ratio calculation.

Standard Home Loan Debt to Income Ratio Limits

FHA – 56.99%
VA – no fixed limit (typically VA maxes out at 56.99%)
Conventional – 45% to 50%
Jumbo – varies on product

Please let me know if you have any questions on how the Debt to income ratio  calculation works.  You can also APPLY NOW.

By Jeremy House

 

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