12 Things First Time Home Buyers Should Know About Debt-to-income Ratio
Image by Diana
Hello again, If you are getting ready to purchase your first home, we are here to help you get to the closing table. Understanding your debt -to-income ratio, is a vital part of the mortgage loan qualification process.
Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is what lenders will use to help them determine your ability to manage your existing monthly payments and to repay your new mortgage loan. That said, here are a few things you should know.
There are two types of ratios that lenders evaluate. The Front-end ratio and the back-end ratio.
The front-end ratio shows the percentage of your income that go towards your housing expenses, such as property tax, principle, interest and insurance.
The back-end ratio is the income you need to cover all your monthly expenses such as credit card payment, car payment, student loan, personal loans and mortgage payment. Your regular living expenses, such as food, and utilities are not included.
A high debt-to-income ratio can prevent you from buying a home.
Each loan type will have different DTI limit requirements.
To calculate your DTI, add up all your monthly debt payments and divide that number by your gross monthly income.
Your gross monthly income is the amount of money you earned before taxes and other deductions.
Let’s say you are paying $1800 a month for rent and another $400 a month for car payment and $700 a month for the rest of your debts. This would put your monthly debt payments at $2,900. If your gross monthly income is $8,000, and your monthly debt payments are $2,900, $8,000 ÷ $2,900 would put your debt-to-income ratio at 36%. This calculation represent your back-end ratio.
FHA front-end ration is 31% and back-end is 43%. Depending on the lender, a bit of flexibility may be allowed.
VA does not have a set maximum DTI, however lenders may want a back-end ration of 41%. Keep in mind, with VA mortgage loan, a higher debt-to-income ratio will not be an automatic denial.
USDA loan front-end ration is 29% and back-end should be at or below 41%
Conventional loans front-end ration of 28% and back end of 36%
As always, thank you so much for stopping by. Until next time…Diana
Image by Diana for First Home Houston
