Understanding Debt-to-Income Ratios
There are several considerations that lenders make when determining your creditworthiness. One of these is called your debt-to-income ratio, or DTI. This calculation factors in many of your revolving debts, plus your income, to see how much cash you have flowing in versus flowing out each month. Read on to learn more about your DTI and how it’s used when purchasing a home.
What Exactly is DTI?
DTI, or debt-to-income ratio, is a mathematical calculation using your monthly income and debts. Your monthly debts are divided by your monthly gross income to determine if you can comfortably afford a mortgage payment each month with your current finances. As an example:
$1500 proposed monthly mortgage payment + $1000 monthly debt / $8000 monthly income = .3125 or 31.25% DTI
Lenders will use this percentage as part of your mortgage application to decide whether you’re ready to take out a loan on a home purchase.
What Debts Are Included In My DTI?
While you may have a variety of outflows each month, the only debts included in your DTI are those that are monthly and recurring. These include:
- Mortgage or rent payments
- Student loans
- Auto loans
- HOA dues
- Credit card/revolving debt payments
- Personal loans
- Child support or alimony
When calculating your DTI, the monthly amount due is what is used – not the total balance. For example, your monthly car payment is included, but not the total balance remaining on the vehicle.
What Debts are Not Included In My DTI?
You may be wondering why certain debts are missing from the above list. Items not considered recurring or fixed expenses are not calculated as part of your DTI. These include:
● Health insurance
● Entertainment and food expenses
● Retirement contributions
● Transportation costs
● Savings contributions
Because these vary monthly and can be altered as needed, they aren’t included in your DTI. However, it’s still important to factor these into your overall budget when deciding how much home you can comfortably afford.
What Income Is Included in My DTI?
We’ve discussed which debts are and aren’t included in your DTI, but now it’s time to shift our focus to income. Your gross monthly income is used to determine your DTI. Your gross monthly income includes all monthly earnings before any deductions, including taxes. This number is calculated using income from all parties on the mortgage application, so if a couple is applying for a mortgage together, both incomes are included – as will both person’s debts.
What Is A Good DTI? Are there different DTI thresholds per loan program?
Once your DTI is calculated, your lender will use this number to determine your creditworthiness. While every type of mortgage has a slightly different DTI threshold, it’s worth noting that the lower your DTI, the better your chances of getting approved for a mortgage.
Please contact your C&F Mortgage Corporation Loan Officer to discuss the maximum DTI for your loan program whether it is an FHA, USDA, VA or Conventional program.
At C&F Mortgage, our team of industry experts is here to help you every step of the way on your journey to homeownership. Get in touch with us today to learn more about how we determine your DTI and everything in between.