WHY DEBT TO INCOME RATIO MATTERS IN MORTGAGE ?
Paying your bills on time, having stable income and boasting a good credit score won't get you a mortgage loan if your lender determines that you live too close to the edge.
In the mortgage lending world, your distance from the edge is measured by your debt-to-income ratio, which, simply put, is a comparison of your housing expenses and your monthly debt obligations versus how much you earn.
Knowing your DTI is just as important as knowing your credit score when you get ready to apply for a home loan, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Vernon Hills, Ill.
"People are so focused on their credit scores and on getting a low interest rate that they forget to look at the big picture of their financials," Conarchy says. "Your debt-to-income ratio plays a huge role. It's a number that can impact whether or not you're getting a mortgage in the first place."
How to figure debt-to-income ratio There are two types of debt-to-income ratios that lenders look at when you apply for a mortgage:
To determine the back-end ratio, add up your monthly debt expenses with your housing expenses and divide the result by your monthly gross income. For instance, suppose you pay $200 per month for a car loan, $50 per month in student loans, and about $100 per month in credit card bills. That adds up to $1,350 in monthly debt obligations, including housing expenses. Based on a monthly income of $3,000, your back-end ratio would be 45 percent.
Recommended debt-to-income ratio Lenders typically say the ideal front-end ratio should be no more than 28 percent, and the back ratio, including all expenses, should be 36 percent or lower.
In reality, depending on credit score, savings and down payment, lenders accept higher ratios. Limits vary depending on the type of loan.
For conventional loans, most lenders focus on your back-end ratio, says Matt Hackett, underwriting manager at Equity Now in New York.
Although it's not written in stone, most conventional loans require a debt to income of no more than 45 percent, he says, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors such as a savings account with a balance equal to six months' worth of housing expenses, he says.
"Anything over 50, you would need to have some considerable compensating factors to get approved," Hackett says. "Something like a 50 percent down payment."
FHA debt-to-income ratio For Federal Housing Administration loans, the recommended debt-to-income limit is 31 percent on the front ratio and 43 percent for the back ratio. But with certain compensating factors, the FHA automated approval system accepts ratios as high as 46.99 for housing expenses and 56.99 for the total back ratio, Hackett says.
"I try to stay away from those," he says. "I don't see how one can make payments when 57 percent of your income is already gone. You have to remember these numbers don't take into account your utilities, cable, phone and all those other expenses."
Ways to get around a high DTI The most obvious and easiest way to lower your debt-to-income ratio is to pay off some of your debt. But most people don't have the money to do so when they are in the process of getting a mortgage, since much of their savings often goes toward the down payment and closing costs.
If you think you can afford the mortgage you plan to get but your DTI is over the limit, a co-signer might help solve your problem.
Borrowers can have a relative co-sign their mortgages on FHA loans. Unlike in conventional loans, FHA co-signers are not required to live in the house with the borrower, but they need to show sufficient income and good credit.
Sometimes a co-signer isn't the answer, Concarchy says.
"Just because you are able to get approved doesn't mean you should get approved," he says. "If your DTI is too high, maybe it's time to take a step back and get your finances together before you commit to a mortgage."
In the mortgage lending world, your distance from the edge is measured by your debt-to-income ratio, which, simply put, is a comparison of your housing expenses and your monthly debt obligations versus how much you earn.
Knowing your DTI is just as important as knowing your credit score when you get ready to apply for a home loan, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Vernon Hills, Ill.
"People are so focused on their credit scores and on getting a low interest rate that they forget to look at the big picture of their financials," Conarchy says. "Your debt-to-income ratio plays a huge role. It's a number that can impact whether or not you're getting a mortgage in the first place."
How to figure debt-to-income ratio There are two types of debt-to-income ratios that lenders look at when you apply for a mortgage:
- The front-end ratio, also called the housing ratio, shows what percentage of your income would go toward your housing expenses, including your monthly mortgage payment, real estate taxes, homeowner's insurance and association dues.
- The back-end ratio shows what portion of your income is needed to cover all of your monthly debt obligations. This includes credit card bills, car loans, child support, student loans and any other debt that shows on your credit report that requires monthlypayments, plus your mortgage payments and other housing expenses.
To determine the back-end ratio, add up your monthly debt expenses with your housing expenses and divide the result by your monthly gross income. For instance, suppose you pay $200 per month for a car loan, $50 per month in student loans, and about $100 per month in credit card bills. That adds up to $1,350 in monthly debt obligations, including housing expenses. Based on a monthly income of $3,000, your back-end ratio would be 45 percent.
Recommended debt-to-income ratio Lenders typically say the ideal front-end ratio should be no more than 28 percent, and the back ratio, including all expenses, should be 36 percent or lower.
In reality, depending on credit score, savings and down payment, lenders accept higher ratios. Limits vary depending on the type of loan.
For conventional loans, most lenders focus on your back-end ratio, says Matt Hackett, underwriting manager at Equity Now in New York.
Although it's not written in stone, most conventional loans require a debt to income of no more than 45 percent, he says, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors such as a savings account with a balance equal to six months' worth of housing expenses, he says.
"Anything over 50, you would need to have some considerable compensating factors to get approved," Hackett says. "Something like a 50 percent down payment."
FHA debt-to-income ratio For Federal Housing Administration loans, the recommended debt-to-income limit is 31 percent on the front ratio and 43 percent for the back ratio. But with certain compensating factors, the FHA automated approval system accepts ratios as high as 46.99 for housing expenses and 56.99 for the total back ratio, Hackett says.
"I try to stay away from those," he says. "I don't see how one can make payments when 57 percent of your income is already gone. You have to remember these numbers don't take into account your utilities, cable, phone and all those other expenses."
Ways to get around a high DTI The most obvious and easiest way to lower your debt-to-income ratio is to pay off some of your debt. But most people don't have the money to do so when they are in the process of getting a mortgage, since much of their savings often goes toward the down payment and closing costs.
If you think you can afford the mortgage you plan to get but your DTI is over the limit, a co-signer might help solve your problem.
Borrowers can have a relative co-sign their mortgages on FHA loans. Unlike in conventional loans, FHA co-signers are not required to live in the house with the borrower, but they need to show sufficient income and good credit.
Sometimes a co-signer isn't the answer, Concarchy says.
"Just because you are able to get approved doesn't mean you should get approved," he says. "If your DTI is too high, maybe it's time to take a step back and get your finances together before you commit to a mortgage."
Why close at the end of the Month?
Mostly, this has to do with lowering your out of pocket costs by minimizing the amount of "prepaid interest" you pay on your mortgage at closing.
Interest on your mortgage begins running from the date your transaction closes, but most loans are due on the first day of the month. So when you close, you "pre-pay" the interest between the closing date and the end of the month. 阅读全文
Mostly, this has to do with lowering your out of pocket costs by minimizing the amount of "prepaid interest" you pay on your mortgage at closing.
Interest on your mortgage begins running from the date your transaction closes, but most loans are due on the first day of the month. So when you close, you "pre-pay" the interest between the closing date and the end of the month. 阅读全文
The Complete Guide to ARM Loans - 3, 5, 7 & 10 Year
What Is an ARM? An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts annually thereafter for the remaining time period for a total of 30 years. After the set time period your interest rate will change and so will your monthly payment. The monthly payment amount is usually subject to a cap. 阅读全文
What Is an ARM? An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts annually thereafter for the remaining time period for a total of 30 years. After the set time period your interest rate will change and so will your monthly payment. The monthly payment amount is usually subject to a cap. 阅读全文
Loan Characteristics and Their Effect on Your Prospective Investment Project
Most real estate investors acquire income properties by obtaining a loan. As you are probably aware, maximizing loan funds (or OPM—Other People’s Money) maximizes leverage and, thus, maximizes returns. The right loan product can easily make or break a real estate investment deal. As such, exploring various loan characteristics is more than warranted. 阅读全文
Most real estate investors acquire income properties by obtaining a loan. As you are probably aware, maximizing loan funds (or OPM—Other People’s Money) maximizes leverage and, thus, maximizes returns. The right loan product can easily make or break a real estate investment deal. As such, exploring various loan characteristics is more than warranted. 阅读全文
Using a Lender Credit to Subsidize Closing Costs
Closing costs typically range from 3%-6% of your loan amount. A closing cost estimate priced today for a loan amount of $200,000 was $7,100 (3.55% of the loan amount). In this scenario the client was not paying any points for the interest rate. 阅读全文
Closing costs typically range from 3%-6% of your loan amount. A closing cost estimate priced today for a loan amount of $200,000 was $7,100 (3.55% of the loan amount). In this scenario the client was not paying any points for the interest rate. 阅读全文
Why debt to income ratio matters in mortgage?
Paying your bills on time, having stable income and boasting a good credit score won't get you a mortgage loan if your lender determines that you live too close to the edge. In the mortgage lending world, your distance from the edge is measured by your debt-to-income ratio, which, simply put, is a comparison of your housing expenses and your monthly debt obligations versus how much you earn. 阅读全文
Paying your bills on time, having stable income and boasting a good credit score won't get you a mortgage loan if your lender determines that you live too close to the edge. In the mortgage lending world, your distance from the edge is measured by your debt-to-income ratio, which, simply put, is a comparison of your housing expenses and your monthly debt obligations versus how much you earn. 阅读全文
The Bi-Weekly Mortgage - Who Needs It?
Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments. 阅读全文
Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments. 阅读全文
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