How to Determine Your Debt-To-Income Ratio

Working out financials can be one of the more complicated aspects of getting a mortgage. Luckily, determining your debt-to-income ratio (DTI) is fairly simple, and it can be an easy way to figure out just how much you can afford for a mortgage. So, what is a DTI, and how do you make the right calculations?

What is DTI?

Debt-to-Income ratio (DTI) is the percentage of a person’s total monthly income that goes toward paying debts. This percentage is used by lenders to determine the borrowing risk of the prospective mortgage applicant.

Essentially, if a borrower’s DTI is too high, mortgage providers may determine that the risk of default is higher than they are willing to accept, and they may either deny the loan or present a loan option with less favorable terms that can act as a protective measure against non-payment. Lenders must be able to demonstrate that they have a reasonable assumption that a borrower has the ability to repay the loan.

How to Calculate your DTI

To determine your DTI, simply add up all monthly debt payments and then divide that number by your gross monthly income. Monthly debt payments may include rent, car notes, credit card payments, student loans, child support payments, mortgages, personal loans, or other recurring payments.

Tools like this DTI calculator can help make it quick and easy to determine your percentage.

How Much Is Considered Too High of a DTI?

The Consumer Financial Protection Bureau (CFPB) establishes the requirement that the lender must make a reasonable and good faith effort to determine at or prior to settlement that the consumer has a reasonable ability to repay the loan according to its terms.

• There are eight (8) focal points the underwriter must use in determining a borrower’s ability to repay:
• Reviewing the consumer’s current or reasonably expected income or assets
• Reviewing the consumer’s employment status if employment income is used to qualify
• Establishing and analyzing the consumer’s monthly payment on the transaction
• Analyzing the consumer’s monthly payment on any simultaneous loan being made with the transaction
• Analyzing the consumer’s monthly payment for any mortgage-related obligations (property taxes, insurance, etc.)
• Analyzing the consumer’s other monthly obligations including alimony, child support, and any other separate maintenance
• Establish and analyze a debt-to-income ratio and residual income for the consumer
• Review and analyze the consumer’s credit history

Most lender use automated underwriting tools to assist in determining if a loan application meets agency requirements. A DTI under the standard 43-45% threshold is used as a suggested benchmark. It is still possible however to obtain a loan with more than 45% DTI, although those cases are generally the exception.

Determining all the financial criteria of a mortgage can be a bit complicated at times. Speaking with a lending professional can often be beneficial in ensuring that borrowers are fully aware of their options. To speak with a mortgage professional today, feel free to give us a call. We will be happy to help you every step of the way.