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Understanding your debt-to-income ratios

Posted on November 9, 2015 by Ray Williams.

When you are looking to get pre-approved for a home mortgage lenders will analyze your debt to income ratios.  This is why it is extremely important that lenders review your pay stubs, W2’s and tax returns.  We want to make sure that all your income is being calculated correctly and we are using the actual figures for your income analysis.

The qualifying ratios will vary depending on the loan program and sometimes this can be the deciding factor on which loan you will need to obtain.   For many of you this part of qualifying for a loan gets overlooked.  You may tend to focus solely on your credit score and how this affects your qualifications.  Yes, credit score is important but is only one piece in the puzzle.  If you have your credit score down and it is in good standing this is great but don’t forget to consider that although you may have been making your payments on time or maybe you have successfully rebuilt your credit. Did you consider what debt you may have could affect your qualifications for a purchase or refinance?

As a consumer you can review your debt to income and analyze your qualifications.  The general rule to debt-to-income ratios is this:

  1. Add up all your incurring debt (all debt reflected on your credit report, student loans, car payments, loans, credit cards, personal loans, etc.) NOT phone bills, cell phones, cable.
  2. Then add your desired monthly mortgage payment
  3. With the total you will now divide this by your GROSS (before taxes) monthly income.

Example:

Car payment $400

                       Student Loan $300

                       Credit Cards $300  

                                              $1000 total monthly debt

$1800 Desired monthly mortgage payment (including taxes & insurance)

$1000 + 1800 = 2800

Gross monthly income $3500

$2800/3500 = .80

With this example the ratio is 80% this is too high and this is only one income. If you are looking to qualify with someone else you will need to do this same process but add in their monthly liabilities and their gross monthly income.

So what would be your options if your ratios are too high? It doesn’t necessarily mean you can’t purchase and/or refinance.  There are a few options you can take to help put you in a position to qualify for a home mortgage.

Option one: Lower your monthly debt. This may seem impossible but if there is a will there is a way.  You can refinance your student loans for a lower monthly payment, same as your car. You could pay off or down any existing debt.  

Option two:  If you are unable to lower any of your existing debt then the next option is to lower your desired monthly mortgage payment.

As a general rule of thumb, keep this in mind: FHA your qualifying debt to income ration can’t be higher than 43%, for Conventional your debt to income ration can’t be higher than 36%.  Now these numbers may possibly have some flexibility which would be discussed and reviewed by your lender.  Please note ideally you do not want to be over these numbers.

Another helpful tool to have would be a mortgage calculator which we have on our website, we also have a mobile app!  Check it out and download here!

If you have any questions please contact us and if you are ready to get pre-approved click here.

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