Thursday, January 13, 2011

Debt-to-Income Ratios (DTI)

What is a debt-to-income ratio?

• The debt-to-income ratio (DTI) is the ratio of liabilities to gross income.
• Used to determine whether someone can afford to pay their mortgage.
• Different loan programs have different DTI ratio requirements.

Front-end and back-end DTI

• FHA loans have 2 DTI ratios
–Front-end ratio (housing ratio)
–Back-end ratio (total debt ratio)
• Conventional loans (non-government loans) and VA loans have only one DTI ratio. In the past, there were 2, but this guideline has changed.

How is the DTI calculated?

• Front-end DTI =
(Principal + interest + taxes + insurance + HOA fees) / total monthly gross income

• Back-end DTI =
(Housing expenses + monthly payments on credit report) / total monthly gross income

What are the DTI ratio guidelines?

• DTI depends on whether the loan is underwritten manually (by a human) or by Fannie Mae’s underwriting software system
• Maximum DTI is always higher when the loan is underwritten using the software
• This is the major reason why you should NEVER use a lender who doesn’t use the underwriting software

Conventional DTI ratio

• Manually underwritten = 36%
–Up to 45% with strong compensating factors
• Underwritten using Fannie Mae software = 45%
–Up to 50% with strong compensating factors
• Compensating factors include:
–Excellent credit
–Very high reserves (money in the bank)
–Large down payment

VA DTI Ratio

• Manually underwritten: 41%
• Underwritten using VA software
– no set maximum ratio
– 45% - 50% is common

FHA DTI ratios

• Manually underwritten: 31% front-end and 43% back-end
• Underwritten using FHA software
– no set maximum ratio
– front-end of 40% and back-end of 50% is common

Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

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