DTI – Debt to Income Ratio

Debt to Income Ratio of borrower is a most important factor to approve mortgage application by lender. DTI is nothing but ratio of total Monthly Debt Payment against total Gross Monthly Income. If for a given borrower committed monthly payment if $500 and that his monthly gross income is $1000 then the DTI ratio is calculated as $500/$1000 * 100 = 50%

Total Monthly Debts includes proposed payment including taxes, insurance and HOA on the property. Along with payment on applied loan it takes into consideration any other line of credit, credit card payments and installment accounts. It does not includes utility bills, medicals, open account, charge off or collection. However if such account being reported on credit report lender might ask borrower pay it off before closing or may verify liquid assets confirming availability of funds to settle these accounts.

If borrower is owing multiple properties monthly flow adjusting income and expenses on each property is calculated on all other properties, excluding subject, and accordingly considered in DTI calculation. If total flow on all additional properties is positive it is considered as income while if its negative it is included in debt in DTI calculation.

Total Gross Monthly Income can be from any given stable source including Job, Business, SSN, Pension, Alimony, Child Support or Investments. What lender primarily looks for while considering any given income source is 2 years history and 3 years possible continuity on same. Applicable Taxes or any other applicable Deductions are not considered while arriving at qualifying income and that application is analyse to calculate DTI based on Gross Income.

Industry benchmark for DTI for all given investors is 43%. Any application if approved above this DTI might take into consideration other compensating factor like Credit Score, Assets and Reserves, Loan to Value on the property and others.

Though any new mortgage debt is approved analyzing the DTI for the borrower majority of them still struggles with their mortgage payment. The primary reason that I personally see is application being qualified based on the Gross Income and not the Net take home Income after adjusting all applicable Taxes and Deductions. Thus for application approved at 43% DTI might have Gross Income of $1000 and Debt of $430 ($430/$1000 * 100 = $43%). However take home income actually available with borrower is mere close to $750 and that with this income he might certainly struggles with monthly payment of $430 since with take home income his actual DTI is 57% ($430/$750 * 100 = 57.33%)

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