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Debt-to-Income ratio | What is a good DTI for a mortgage?

Jim Quist Jan 4, 2023 12:34:06 PM
Debt-to-income ratio DTI mortgage

Debt-to-income (DTI) is a measure that compares the amount of debt you have to the amount of income you receive. Lenders use this ratio to determine how much you can afford to pay for a home loan. A higher DTI may indicate that you have too much debt and can't afford the payments on a new mortgage.

In this article, I’ll explain the mortgage debt-to-income ratio, how lenders calculate it, and the DTI you need to get a home loan.

 

How to calculate DTI

To calculate your DTI, the lender adds up all your monthly debt payments, including the estimated future mortgage payment. Then, they divide the total by your monthly gross income to determine your DTI ratio.

Here is an example of how a lender might calculate your debt-to-income (DTI) ratio for a mortgage:

 

Let's say your gross monthly income is $10,000, and your total monthly debt payments are $4,300, including the future mortgage payment (PITI). To calculate your DTI, the lender divides your monthly debt payments by your gross monthly income like this: 

  • DTI ratio = $4,300 / $10,000 = 43%

 

In this case, your DTI ratio would be 43%. Lenders generally prefer to see a DTI ratio of 43% or less. However, some may consider higher ratios on a case-by-case basis - more about DTI limits later.

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What is gross monthly income?

Gross monthly income is a person's total income per month before taxes and other deductions. It includes all sources of income, such as salary, wages, tips, bonuses, and self-employment income.

 

To calculate gross monthly income, add the income from all the borrowers on the loan application for the year and divide the total by the number of months in the year (12). For example, if you and your partner are applying for a mortgage, and your combined annual income is $120,000, your gross monthly income is $10,000.

 

What debts do lenders use to calculate debt-to-income (DTI)?

Lenders consider the following types of debts when calculating your debt-to-income (DTI) for a mortgage. 

  • Credit cards - the minimum payment from the credit report. Suppose the credit report does not show a minimum amount. In that case, the lender uses 5% of the outstanding balance for the monthly debt. Or, they'll use the monthly payment on your credit card statement. 
  • Installment loans, such as car and student loans, with more than ten payments remaining
  • Other mortgages and real estate owned that you'll retain
  • Support payments - any alimony, child support, or separate maintenance payments you must make under a written agreement

Lenders will use your future mortgage payment - the estimated housing payment of principal & interest, taxes, insurance, and homeowner's association dues, if applicable when calculating the debt-to-income (DTI) for a mortgage. 

To see the actual rate and monthly payment, including all components of the PITI, check out our Mortgage Calculator. Then, feel confident in buying a home because you know what to expect. 

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What debts do lenders exclude when calculating the debt-to-income ratio for a mortgage?

Lenders generally exclude certain debts when calculating a mortgage's debt-to-income (DTI). These debts may include:

  • Debts that you'll pay off within ten months of the mortgage closing date
  • Debts not reported on credit reports, such as utility bills and medical bills
  • Debts paid by others

To exclude debt others pay, you'll need to prove to the lender that someone else made the payments on time for at least the last 12 months. Lenders accept 12 months' bank statements or canceled checks.

If the debt is a mortgage, to exclude it and the total monthly housing payment (PITI) from your DTI, the person making the payments must be on the mortgage - they signed the loan agreement. 

 

Let's say your parents co-signed the mortgage you used to buy a house last year. And since then, you have made the payments on time, at least for the previous 12 months. When your parents apply for a mortgage to buy a refinance their home, they may exclude your debt - the debt from the mortgage they co-signed for you, by providing their lender with copies of your bank statements proving you made timely mortgage payments for the last 12 months. 

 

Lenders may use different methods for calculating DTI, so it's always a good idea to check with your lender to determine which debts they will exclude from the calculation.

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Are DTI limits different for conventional and FHA loans?

The debt-to-income (DTI) limits for mortgage loans can vary depending on the type of mortgage and the lender's requirements.

For a conventional mortgage, the DTI ratio limits are typically lower than those for other types of mortgages, such as FHA or VA loans. Lenders generally prefer to see a DTI ratio of 43% or less. 

However, some may consider a higher DTI of up to 50% on a case-by-case basis.

For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.

DTI ratio limits for mortgage loans vary depending on the lender and your circumstances. Therefore, it's always a good idea to check with a lender, like NewCastle Home Loans, for the specific DTI ratio requirements.

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Jim Quist NewCastle Home Loans
JIM QUIST
President and Founder of NewCastle Home Loans. Jim has been in the mortgage business for 20+ years.

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