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Debt-to-Income (DTI) Ratio is one of the many new mortgage related terms many First-Time Home Buyers in California will get used to hearing.
DTI is a component of the mortgage approval process that measures a borrower’s Gross Monthly Income compared to their credit payments and other monthly liabilities.
Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs.
There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.
Two Types of DTI Ratios:
a) Front End or Housing Ratio:
- Calculated by dividing the total monthly primary residence payment (Principal, Interest, Property Tax, Home Insurance, HOA and Mortgage Insurance) by the gross monthly income
b)Back End or Total Debt Ratio:
- Calculated by dividing the total monthly housing payment plus all consumer debt by the gross monthly income
Most loan programs allow for a Total DTI of 45%. In some cases like FHA loans, higher DTI ratios may be allowed. However, on large loan amounts called Jumbo loans, lower DTI may apply.
Housing DTI is usually not a qualifying factor, unless you are looking for an 80/10/10 loan where Front End or Housing Ratio of 38% is required.
Remember, the DTI Ratios are based on gross income before taxes.Lenders also prefer to use W2’s or tax returns to verify income and employment.
However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs.Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.
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