Know Your Numbers
How To Calculate Your Mortgage DTI Ratios
When it comes to buying a home one of the most important numbers you need to know is your debt-to-income ratio (DTI). It’s a fairly easy calculation as long as you know how it works. First, you need to add all your liabilities (mainly accounts showing on your credit report) and divide it by your gross income, (i.e. $500 liabilities / $3000 gross income = 16.67% DTI). This is a very low DTI and most people that don’t own a house or an expensive car, boat, RV, etc., will have a low DTI. However, what most first-time homebuyers don’t know is how the math works when buying a house; they don’t realize the DTI lenders use includes the “proposed” (future) mortgage payment, including hazard insurance, mortgage insurance, property taxes and even HOA if there is one.
How It Works:
To illustrate how the math works, let’s say the total proposed mortgage payment equals $1400 a month. Because of the increase of $1400 a month in future mortgage payments the DTI becomes a lot higher ($500 liabilities + $1400 proposed mortgage payment / $3000 gross income = 63.34% DTI). In this case, the borrower wouldn’t qualify for a mortgage payment at $1400 a month, which means they have to find a smaller or cheaper home, or put more money down, or payoff some liabilities first. The max proposed mortgage payment for this particular borrower would be $1200 ($500 liabilities + $1200 liabilities / $3000 gross income = 56.67% DTI), just under the 56.99% FHA lender guideline. At a higher DTI we would have to go FHA since the DTI tolerance for an FHA loan is higher. Just remember that the higher the DTI the riskier it is to get a loan approval. If you chose a Conventional loan the max proposed mortgage payment would have to be $850 a month or only 45% DTI ($500 liabilities + $850 proposed mortgage payment / $3000 gross income = 45% DTI) according to Fannie Mae’s and Freddie Mac’s guidelines. In other words, less buying power.
Fortunately enough though, due to constant market changes in the mortgage industry, Fannie Mae changed their DTI requirement to 50% instead of 45% as of July 29, 2017. This means that borrowers now have more buying power if they choose to go Conventional. Instead of $850 proposed mortgage payment they would now be able to go up to $1000 ($500 liabilities + $1000 proposed mortgage payment / $3000 gross income = 50% DTI). There are pros and cons for each program, but at the end of the day the most important part of buying or refinancing your home is finding the mortgage payment you’re most comfortable with and is able to afford.
Conclusion:
Know your numbers so you can better prepare yourself for your next mortgage transaction. Planning ahead is the best way of finding exactly what you’re looking for.
