How to calculate debt to income ratio (DTI)
First step to buying a home is speaking with a lender. A big part of qualifying for a home purchase, is what is the home buyer’s debt to income ratio (also referred as DTI). A buyer will qualify based on many different factors for a loan. Debt to income ratios will set the price and affordability the buyer qualifies for, for their home purchase.
Debt to income ratio is used on gross income and not your net income. Any regular payments you receive which can include child support, rental income, disability, or pensions. Your expenses are any expenses that show up on your credit report. The sum excludes childcare expenses, entertainment cost, utilities, groceries or any other non regular spending.
Most common items that are calculated and appear on a credit report are Car payments, minimum credit card payments, personal loan payments or other mortgages, student loans, monthly alimony or child support.
Step 1: Take the gross annual income for each buyer that is expected to be on the loan to purchase the home. Divide it by 12 month to figure an average monthly income.
Step 2: Total the amount of expenses for the month. Only include the expenses that appear on your credit report. Calculate each borrower separately based on each owns credit report.
Step 3: Divide the expense to the income to calculate your debt to income ratio.
Example Income is $10,000 a month / Debt of $3500 = 35% Debt to income ratio.
There are 2 types of debt ratios
Front-end debt ratios consist of proposed monthly housing expenses, divided by your income. Housing expenses are principle payment, interest, property taxes, and expected homeowner’s insurance. Front-end ratios may not represent what the buyer wants to afford but assumed by the lender what the buyer can afford.
Bank-end ratio includes all existing debt plus your proposed monthly housing expenses. This figure is more accurate to what a buyer would want to spend and qualify for.
Each lender and every home buyer will have their own guidelines and hurdles to jump when applying for a home loan. Most lenders will require a 43% debt to income ratio. Other factors apply when applying for a loan. Call us for guidance and to figure out which loan program is right for you home buying process.
If you’d like more info on debt to income ratios or help finding a lender to assist you, please fill out form below.
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