Debt to Income Ratios Explained
Debt to Income Ratios (or DTI’s) in the real estate language are one of the most important factors when qualifying for a home loan.
Your DTI needs to be at 43% or less. If you have a DTI of over 43% you should consolidate some debt to get your minimum monthly payments lower, or pay off the debt. If your DTI is over 43% you will have a very difficult time getting approved for a mortgage loan.
See the information below.
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What’s the 43% Rule?
The 43% rule is a ratio of debt-to-income, and a crucial standard for deciding who qualifies for a loan and who doesn’t.
In reviewing loan applications, lenders compute the ratio of a person’s debt relative to income. The standard for qualifying for a home loan is 43 percent for loans through the Federal Housing Authority and VA.
Conventional home loans prefer the DTI be closer to 36% to insure you can afford the payments, but the truth is that qualifying standards vary from lender-to-lender.
If monthly debt payments exceed 43 percent of calculated income, the person is unlikely to qualify, even if he or she pays all bills on time.
What Is a Debt-to-Income Ratio?
The debt-to-income ratio (DTI) is the amount of your total monthly debt payments divided by how much money you make a month. It allows lenders to determine the likelihood that you can afford to repay a loan.
In the DTI calculation include in Section A: All monthly debt payments such as: mortgage payment (including HOA, taxes, insurance), car payments, student loan payments, child support, alimony, spousal maintenance payments.
Do NOT include: Utility payments, cable, car insurance, health insurance or medical bills, cell phone, groceries, entertainment or child care.
In Section B: Include wages from all sources, alimony, child support, spousal maintenance, pensions, income from investments or rental property, social security, disability income.
Divide A by B then multiply that number by 100 to see your DTI.
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