By: Michael TetrickOct 12, 2021
The Impact of Debt-To-Income Ratio (DTI) on Mortgage? Do you measure up? Lenders are friendly people if they can do business with you. Well, they're probably friendly anyway, but you're not looking for a friend. You're looking for a lender. And even if you have a friend that's a lender, chances are they won't be able to help much if you have the wrong DTI Ratio.
So back to the original question: Do you measure up? With your DTI? And How Much Debt Is Acceptable For A Mortgage? And What Is DTI Ratio?
Well, Debt To Income Ratio is kind of self-explanatory. How much of your income needs to be applied to your debt. This is important to know just on general principles, but our focus is how DTI Ratio For Mortgage affects you. The debt to income ratio is usually depicted as a percentage, illustrating how much of your income is used to pay off your debts. You make regular payments on anything, such as home loan or rent, auto loan, and credit card payments.
Total debt (monthly) / Total income (monthly) X 100 = DTI Ratio.
But to complicate things, there are two kinds of DTI ratios:
- Front-end DTI – this is only (your anticipated new mortgage) housing-related debt.
- Back-end DTI – this is all of your debt.
Of course, there are Mortgage DTI Limits. Usually, a DTI of 36% (Front end) and 45% (Back end) would qualify you for a conventional 30-year fixed-rate mortgage. But Mortgage DTI Requirements vary with the type of mortgage you buy. 15-year, 30 years, Fixed, Variable. What is the DTI ratio for FHA Loans? 31% on the Front end and 43% on the Back end.
The Impact of Debt-To-Income Ratio. But What Exactly Are Mortgage DTI Requirements?
Now it starts to get interesting. As you might expect, the various types of mortgages have different requirements, including the acceptable DTI ratios.
- FHA Loans – A Federal Housing Administration (FHA) loan is a mortgage insured by the Federal Housing Administration and administered by an FHA-approved lender. FHA loans are meant for low-to-moderate-income borrowers. Requirements are a lower minimum down payment and lower credit scores than conventional loans. FHA Loans DTI requirements are Front End 31% and Back End 43%.
- VA Loans – the Veterans Administration supplies loans for military veterans, and there are many advantages associated with them:
- No Down Payment
- Private Mortgage Insurance is not required
- Competitive Interest Rates
- Relaxed Credit Requirements
- Closing Cost Limits
- Foreclosure Avoidance
Not surprisingly, the DTI requirements are generous: Front End TBD, Back End 41% with lenders free to go higher.
- Conventional Loans – most buyers apply for a conventional loan, a mortgage loan that a government agency does not back. Conventional loans are broken down into "conforming" and "non-conforming" loans (that exceed the $548,250 limit for conforming): 36% Front End, 45% Back End.
- USDA Loans – the Department of Agriculture will back low-interest mortgages with zero down payments designed for low-income Americans who don't have good enough credit to qualify for traditional mortgages. However, there are location limits: Front End 29%, Back End 41%.
How to improve your DTI ratio
If your DTI Ratio doesn't meet the numbers listed above, there are ways to reach your goal of homeownership.
- Pay off the debts with the highest interest rates first. Not only do lenders look at your debt, but they also consider the interest rate on that debt.
- Pay more than the minimum payment. If you want to reduce the DTI ratio, you need to be aggressive. Forgoing new purchases in favor of paying down existing debt is a good beginning.
- Defer new purchases to accumulate a larger down payment. The size of your down payment can go a long way to advancing your mortgage application.
- Don't incur any new debt until your current debt is reduced. Do you need that new toy? Or do you want to buy a home?
- Lower monthly expenses in order to save more. Go through your budget and eliminate things that you don't need.
The Impact of Debt-To-Income Ratio? Solved. Now get that mortgage!
Prospective homebuyers can use this information to improve their chances of getting a mortgage. But the data is only as valuable as your ability to use it. It may require sacrifice, and it certainly requires dedication, but use your determination to become a homeowner to fuel your actions.