• July 07, 2014
  • Comments : 1
  • In Category : Mortgage

Mortgage application

Debt to Income Ratio

The debt to income ratio (DTI) is a very important factor for qualifying for a mortgage. What is a Debt to Income Ratio? The Debt to Income Ratio compares the applicant’s total fixed monthly expenses like monthly housing expense and other monthly debt obligations to their gross income.

Some examples of monthly housing expenses are monthly housing costs or the housing ratio and other payments like home equity loan payments, car payments, monthly credit card minimum payments, personal loans, student loan payments, monthly alimony or child support payments and any other standing monthly payments.

The first item on the list is the housing ratio. The housing ratio is also called the housing expense ratio or front end ratio. The housing ratio compares the applicant’s monthly loan payment to their income. The loan payment includes the monthly principal and interest payment; any private mortgage insurance (PMI) or mortgage insurance premium (MIP) payments; 1/12 property tax bill; 1/12 homeowner’s insurance premium; any monthly homeowners’ association dues (HOA). Sometime the acronym PITI is used for these expenses. PITI is Principal Interest Taxes and Insurance.

The rule is the maximum Debt to Income Ratio (DTI) is 43%.

Knowing the Debt to Income Ratio rule of 43% DTI can be the basis to find out how much house a person can afford to buy, based on his income and other expenses. This may entail certain income tests involving analysis of income and use of these qualification ratios. The qualifying ratios are the housing ratio, or front-end ratio, and the debt ratio, or back-end ratio. An applicant must be required to satisfy the DTI ratio to qualify for a Qualified Mortgage loan.

If a borrower has over 43% DTI there may be mortgage loans in the market place but it will be harder to qualify and a higher cost loan. This may be in the form of higher interest rate, fee or both. But the amount may not be very much more. Sometimes just a quarter percent interest more and maybe only one more point of loan fees. The market changes every day check with a mortgage professional before making any decision.

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