House Hunting? Here’s What to Understand about your Debt-to-Income Ratio
Determining the appropriate mortgage amount for hopeful homebuyers involves a number of considerations and tools. A calculation known as the debt-to-income ratio (DTI) is one of them. If you’re ready to take the plunge on a new house, the Cushing Team in Reno is sharing what you should understand about your DTI ratio.
The DTI ratio is a comparison of your gross monthly income (before taxes) to your monthly liabilities, which includes the mortgage on your new house. Payments like insurance, household expenses, and utilities aren’t usually included in your calculation, but auto loans, student loans, credit card payments, co-signed loans, and alimony or child support are all fair game. The math is straightforward:
Total monthly debt / gross monthly income = DTI percentage
On the income side, bonuses, commissions, overtime, tips, alimony or child support, investments, and rental property earnings are all included.
The lower the percentage, the easier it should be for homeowners to pay their monthly debts. If the DTI percentage is on the higher end, it’s an indication that a borrower’s monthly income goes toward a number of bills. That could be a sign of a risky scenario for a lender – if a borrower has multiple monthly bills, it may be difficult to pay the mortgage.
What’s a Good DTI Ratio?
Different home loan programs, like conventional or FHA loans, have their own guidelines for qualifying DTI ratios. A good ratio, then, is determined by the different loan program. The Cushing Team can help you calculate your DTI ratio and make recommendations about a suitable loan program, so contact us today. In general, though, a reasonable DTI ratio is no higher than 43%.
It’s not enough to just tell a lender your annual income, so you may be asked to provide the following documentation:
- Two years’ worth of W2s or federal tax returns if you’re self-employed
- Two months of recent bank statements
- The previous month’s pay stubs
- Two months of investment account statements, if applicable
- Rental agreements for investment properties, if applicable
What If I’m Self-Employed or Commission Based?
Income used for a DTI calculation is treated the same way, but lenders will likely take a close look if you’re self-employed or earn commissions or tips. Be prepared to show two years of financial records if you’re submitting documentation other than W-2 wages. Those two years of records will serve as an indication of future income.
What About Exceptions to the DTI Ratio?
In some cases, lenders will overlook a high DTI ratio and charge a higher interest rate or add a risk premium fee.
Ask us! The Cushing Team is happy to answer all of your questions about DTI ratios and other elements of the home loan process. If a new house is on your wish list, let’s talk about how to make it happen.